CONSTELLIS HOLDINGS FINANCIALS FY16 Q1
Constellis Holdings, LLC and Subsidiaries Consolidated Financial Statements for the quarter ended March 31, 2016
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of March 31, 2016 and 2015
1
Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015
2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
3
Notes to Consolidated Financial Statements
4–11
Constellis Holdings, LLC and subsidiaries CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA)
March 31, 2016 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents Term deposits Accounts receivable, net Inventory 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 Current portion of long-term debt Total current liabilities LONG-TERM LIABILITIES: Long-term debt, net of current portion Deferred income tax liability Other long-term liabilities Total long-term liabilities TOTAL LIABILITIES
$
43,630 5,280 265,248 9,148 45,221 368,527 104,903 99,142 256,067 18,434 478,546 847,074
144,299 33,336 9,875 209 187,719
December 31, 2015 (Audited)
$
$
$
41,104 5,447 279,884 8,669 47,251 382,355 109,016 103,162 263,237 15,087 490,502 872,858
134,251 28,172 9,708 209 172,339
583,277 10,799 13,056 607,132 794,851
625,667 10,798 12,229 648,694 821,033
50,998 752 51,750 472 52,223 847,074
50,998 469 51,467 357 51,824 872,858
COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY: Membership units, no par value, 63,047 units authorized, issued and outstanding Members' capital Retained earnings Total Constellis Holdings, LLC's members' equity Noncontrolling interest in joint ventures Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY See notes to consolidated financial statements.
1
$
$
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS)
Three Months Ended March 31, 2016 Revenues
$
Cost of revenue
2015
236,050
$
195,236
174,744
146,449
61,306
48,787
17,582 13,564 16,252
17,132 8,804 6,412
Operating income
13,908
16,439
Other (income) Expense Interest income Interest expense Other income, net Total other (income) expense
12,809 (342) 12,467
(120) 5,337 (181) 5,036
Net income before taxes
1,441
11,403
Income tax provision
1,158
3,557
Gross profit Other operating expenses Selling, general and administrative expenses Depreciation and amortization
Net Income
$
Net Loss (Income) attributed to noncontrolling interest
283
$
115
Net Income attributed to Constellis Holding, LLC
$
See notes to consolidated financial statements.
2
168
7,846 (77)
$
7,923
Constellis Holdings, LLC and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS ) Three Months Ended March 31, 2016 OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Provision for obsolete 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 Other long-term liabilities Deferred revenue Cash provided by operating activities
$
INVESTING ACTIVITIES: Capital expenditures Term Deposits Cash used in investing activities FINANCING ACTIVITIES: Payments on ABL facility Proceeds from Revolver Payments on Term Loans A Cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS — Beginning of the quarter CASH AND CASH EQUIVALENTS — End of quarter
3
$
2015 283
$
7,846
16,252 (193)
6,412 -
14,635 (285) 2,030 (3,069) 10,048 5,164 828 167 45,861
4,122 (172) (4,321) (11,541) 2,429 3,277 (3,357) 4,695
(1,002) 167 (835)
(345) (345)
(42,500) (42,500)
3,991 (4,375) (384)
2,526
3,966
41,104 43,630
$
7,085 11,051
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) provides vertically integrated risk management solutions and complex program management support solutions to governments and commercial customers 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, U.S. Intelligence Community, U.S. Department of Energy, foreign governments, and multinational commercial oil & gas customers. The Company is headquartered in Reston, Virginia. On May 11, 2015, the Company acquired 100% of the outstanding stock of Olive Group Holdings Ltd. (“Olive Group”), a limited liability company in the British Virgin Islands. As a result of this acquisition, Olive Group and subsidiaries became wholly owned subsidiaries of the Company.
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, Olive Group, 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 Generally Accepted Accounting Principles in the United States of America (“GAAP”) and present our financial position, results of operations and cash flows and changes in financial position. All intercompany balances and transactions have been eliminated. 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 Sheet. The Company has included the minority interest in earnings of the entities within its Consolidated Statement of Income in net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company.
4
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 earns a majority of its revenue from contracts with the federal government, directly as a prime contractor or indirectly as a subcontractor including several significant contracts with the U.S. Department of State (“DoS”) and U.S. Department of Defense (“DoD”). The Company’s also earns revenue on contracts with commercial customers. Such contracts are generally long-term contracts under cost reimbursement, time and material or 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. Revenue from the sale of goods on commercial contracts is recognized when the significant risks and rewards of ownership of the goods have passed to the customer, usually on delivery of the goods. 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. All costs, both direct and indirect, are charged to expense as incurred. Other operating expenses include all overhead costs and fringe costs, exclusive of depreciation and amortization, allocable to contracts. Fair Value of Financial Instruments — The carrying value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s credit facility approximates fair value as the pricing and terms of such instrument is generally variable based on market rates, and is indicative of the Company’s current credit risk. 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.
5
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. Term Deposits — Term deposits have original maturities in excess of three months and are held with commercial banks in the United Arab Emirates (“UAE”), Iraq, and Afghanistan. The deposits are denominated in US Dollars and UAE Dirhams, with an effective interest rate of 1% and are pledged with the banks against guarantees provided by them. 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: Years
Land and land improvements Buildings and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems
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. 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, 2016, 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
6
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. In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. The amendments in this Update allow an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the amendments that elects the accounting alternative in this ASU should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. The disclosures required under this alternative are similar to existing GAAP. However, an entity that elects the accounting alternative is not required to present changes in goodwill in a tabular reconciliation. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted. The Company adopted ASU-2014-2 effective January 1, 2015. The Company has elected to amortize existing goodwill over 10 years and test goodwill for impairment at the entity level when there is a triggering event. 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
7
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 sheet 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 FASB issued 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 $215,565, which included $50,000 of Class A Units of the company at fair value. The acquisition was financed through the initial borrowings under a $125,000 asset-based revolving credit facility (“ABL facility”) and the issuance of $450,000 in senior secured notes, which also refinanced our existing senior credit facility, line of credit, and subordinated notes.
4.
ACCOUNTS RECEIVABLE
Mar 31, 2016 Billed Unbilled Other
$
Total accounts receivable
111,432 157,255 1,863
Dec 31, 2015 $
270,550
Less allowance for doubtful accounts
285,186
(5,302)
Total receivables - net
$
8
265,248
134,582 148,978 1,626
(5,302) $
279,884
5.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Mar 31, 2016
Dec 31, 2015
Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
8,003 22,203 15,014
$
8,073 22,203 16,975
Total prepaid expenses and other current assets
$
45,221
$
47,251
PROPERTY AND EQUIPMENT
Mar 31, 2016 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 Less accumulated depreciation Total property and equipment - net
7.
$
16,095 43,502 12,018 22,498 43,433 6,120 3,262 957
Dec 31, 2015 $
16,095 43,502 12,018 21,998 43,133 5,918 3,262 957
147,885
146,883
(42,982)
(37,867)
104,903
$
109,016
INTANGIBLE ASSETS AND GOODWILL Mar 31, 2016 Gross Carrying Accumulated Amount Amortization
Useful Life
Net Carrying Amount
Customer relationships/contract backlog Tradename and trademarks Database
8 to 15 years 4 to 8 years 5 years
$
103,100 32,000 2,400
$
31,211 6,339 808
$
71,889 25,661 1,592
Total intangible assets
4 to 15 years
$
137,500
$
38,358
$
99,142
All intangibles are amortized using a straight-line method of amortization based upon the estimated life of the asset and the expense is included in depreciation and amortization expenses.
9
Goodwill consists of the following:
Gross goodwill Accumulated impairment losses Gross carrying amount of goodwill Accumulated amortization Net goodwill balance
Mar 31, 2016
Dec 31, 2015
$
286,747
$ 286,747
$
286,747 (30,680) 256,067
286,747 (23,511) $ 263,236
All goodwill is amortized using a straight-line method of amortization based upon the estimated life of the asset and the expense is included in depreciation and amortization expenses. The weighted average amortization period for the goodwill is 10 years. 8.
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Mar 31, 2016
Dec 31, 2015
Accounts payable Accrued taxes payable DCAA reserve Other accrued expenses
$
84,317 5,118 24,366 30,499
$
82,645 5,118 26,766 19,722
Accounts payable and accrued expenses
$
144,299
$
134,251
DEBT On May 11, 2015, the Company acquired all of the outstanding shares of Olive Group Holdings Ltd. for a total purchase price of $215,565, which included $50,000 of Class A Units of the company at fair value. The acquisition was financed through the initial borrowings under a $125,000 asset-based revolving credit facility (“ABL facility”) and the issuance of $450,000 in senior secured notes, which also refinanced our existing senior credit facility, line of credit, and subordinated 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.
10
Mar 31, 2016 Credit facilities: ABL credit facility (drawdown) Senior Secured Notes
$
Notes: Minority shareholder notes Replacement notes Subremainder notes
90,000 450,000
892 9,501 34,670
Capital lease
231
Total debt
585,294
Less: original issue discount
1,808 583,486
Less: current portion Total long-term debt
209 $ 583,277
******
11
Constellis Holdings, LLC and subsidiaries
TABLE OF CONTENTS
Page CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of March 31, 2016 and 2015
1
Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015
2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
3
Notes to Consolidated Financial Statements
4–11
Constellis Holdings, LLC and subsidiaries CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT UNIT DATA)
March 31, 2016 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents Term deposits Accounts receivable, net Inventory 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 Current portion of long-term debt Total current liabilities LONG-TERM LIABILITIES: Long-term debt, net of current portion Deferred income tax liability Other long-term liabilities Total long-term liabilities TOTAL LIABILITIES
$
43,630 5,280 265,248 9,148 45,221 368,527 104,903 99,142 256,067 18,434 478,546 847,074
144,299 33,336 9,875 209 187,719
December 31, 2015 (Audited)
$
$
$
41,104 5,447 279,884 8,669 47,251 382,355 109,016 103,162 263,237 15,087 490,502 872,858
134,251 28,172 9,708 209 172,339
583,277 10,799 13,056 607,132 794,851
625,667 10,798 12,229 648,694 821,033
50,998 752 51,750 472 52,223 847,074
50,998 469 51,467 357 51,824 872,858
COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY: Membership units, no par value, 63,047 units authorized, issued and outstanding Members' capital Retained earnings Total Constellis Holdings, LLC's members' equity Noncontrolling interest in joint ventures Total members' equity TOTAL LIABILITIES AND MEMBERS' EQUITY See notes to consolidated financial statements.
1
$
$
Constellis Holdings, LLC & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS)
Three Months Ended March 31, 2016 Revenues
$
Cost of revenue
2015
236,050
$
195,236
174,744
146,449
61,306
48,787
17,582 13,564 16,252
17,132 8,804 6,412
Operating income
13,908
16,439
Other (income) Expense Interest income Interest expense Other income, net Total other (income) expense
12,809 (342) 12,467
(120) 5,337 (181) 5,036
Net income before taxes
1,441
11,403
Income tax provision
1,158
3,557
Gross profit Other operating expenses Selling, general and administrative expenses Depreciation and amortization
Net Income
$
Net Loss (Income) attributed to noncontrolling interest
283
$
115
Net Income attributed to Constellis Holding, LLC
$
See notes to consolidated financial statements.
2
168
7,846 (77)
$
7,923
Constellis Holdings, LLC and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS ) Three Months Ended March 31, 2016 OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Provision for obsolete 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 Other long-term liabilities Deferred revenue Cash provided by operating activities
$
INVESTING ACTIVITIES: Capital expenditures Term Deposits Cash used in investing activities FINANCING ACTIVITIES: Payments on ABL facility Proceeds from Revolver Payments on Term Loans A Cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS — Beginning of the quarter CASH AND CASH EQUIVALENTS — End of quarter
3
$
2015 283
$
7,846
16,252 (193)
6,412 -
14,635 (285) 2,030 (3,069) 10,048 5,164 828 167 45,861
4,122 (172) (4,321) (11,541) 2,429 3,277 (3,357) 4,695
(1,002) 167 (835)
(345) (345)
(42,500) (42,500)
3,991 (4,375) (384)
2,526
3,966
41,104 43,630
$
7,085 11,051
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) provides vertically integrated risk management solutions and complex program management support solutions to governments and commercial customers 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, U.S. Intelligence Community, U.S. Department of Energy, foreign governments, and multinational commercial oil & gas customers. The Company is headquartered in Reston, Virginia. On May 11, 2015, the Company acquired 100% of the outstanding stock of Olive Group Holdings Ltd. (“Olive Group”), a limited liability company in the British Virgin Islands. As a result of this acquisition, Olive Group and subsidiaries became wholly owned subsidiaries of the Company.
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, Olive Group, 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 Generally Accepted Accounting Principles in the United States of America (“GAAP”) and present our financial position, results of operations and cash flows and changes in financial position. All intercompany balances and transactions have been eliminated. 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 Sheet. The Company has included the minority interest in earnings of the entities within its Consolidated Statement of Income in net income (loss) and deducted the same amount to derive net income (loss) attributable to the Company.
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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 earns a majority of its revenue from contracts with the federal government, directly as a prime contractor or indirectly as a subcontractor including several significant contracts with the U.S. Department of State (“DoS”) and U.S. Department of Defense (“DoD”). The Company’s also earns revenue on contracts with commercial customers. Such contracts are generally long-term contracts under cost reimbursement, time and material or 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. Revenue from the sale of goods on commercial contracts is recognized when the significant risks and rewards of ownership of the goods have passed to the customer, usually on delivery of the goods. 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. All costs, both direct and indirect, are charged to expense as incurred. Other operating expenses include all overhead costs and fringe costs, exclusive of depreciation and amortization, allocable to contracts. Fair Value of Financial Instruments — The carrying value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s credit facility approximates fair value as the pricing and terms of such instrument is generally variable based on market rates, and is indicative of the Company’s current credit risk. 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.
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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. Term Deposits — Term deposits have original maturities in excess of three months and are held with commercial banks in the United Arab Emirates (“UAE”), Iraq, and Afghanistan. The deposits are denominated in US Dollars and UAE Dirhams, with an effective interest rate of 1% and are pledged with the banks against guarantees provided by them. 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: Years
Land and land improvements Buildings and building improvements Leasehold improvements Equipment, furniture and firearms Vehicles Computer hardware and software Range target systems
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. 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, 2016, 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
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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. In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. The amendments in this Update allow an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the amendments that elects the accounting alternative in this ASU should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. The disclosures required under this alternative are similar to existing GAAP. However, an entity that elects the accounting alternative is not required to present changes in goodwill in a tabular reconciliation. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted. The Company adopted ASU-2014-2 effective January 1, 2015. The Company has elected to amortize existing goodwill over 10 years and test goodwill for impairment at the entity level when there is a triggering event. 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
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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 sheet 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 FASB issued 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 $215,565, which included $50,000 of Class A Units of the company at fair value. The acquisition was financed through the initial borrowings under a $125,000 asset-based revolving credit facility (“ABL facility”) and the issuance of $450,000 in senior secured notes, which also refinanced our existing senior credit facility, line of credit, and subordinated notes.
4.
ACCOUNTS RECEIVABLE
Mar 31, 2016 Billed Unbilled Other
$
Total accounts receivable
111,432 157,255 1,863
Dec 31, 2015 $
270,550
Less allowance for doubtful accounts
285,186
(5,302)
Total receivables - net
$
8
265,248
134,582 148,978 1,626
(5,302) $
279,884
5.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Mar 31, 2016
Dec 31, 2015
Prepaid insurance, rent and maintenance Income tax receivables Other current assets
$
8,003 22,203 15,014
$
8,073 22,203 16,975
Total prepaid expenses and other current assets
$
45,221
$
47,251
PROPERTY AND EQUIPMENT
Mar 31, 2016 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 Less accumulated depreciation Total property and equipment - net
7.
$
16,095 43,502 12,018 22,498 43,433 6,120 3,262 957
Dec 31, 2015 $
16,095 43,502 12,018 21,998 43,133 5,918 3,262 957
147,885
146,883
(42,982)
(37,867)
104,903
$
109,016
INTANGIBLE ASSETS AND GOODWILL Mar 31, 2016 Gross Carrying Accumulated Amount Amortization
Useful Life
Net Carrying Amount
Customer relationships/contract backlog Tradename and trademarks Database
8 to 15 years 4 to 8 years 5 years
$
103,100 32,000 2,400
$
31,211 6,339 808
$
71,889 25,661 1,592
Total intangible assets
4 to 15 years
$
137,500
$
38,358
$
99,142
All intangibles are amortized using a straight-line method of amortization based upon the estimated life of the asset and the expense is included in depreciation and amortization expenses.
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Goodwill consists of the following:
Gross goodwill Accumulated impairment losses Gross carrying amount of goodwill Accumulated amortization Net goodwill balance
Mar 31, 2016
Dec 31, 2015
$
286,747
$ 286,747
$
286,747 (30,680) 256,067
286,747 (23,511) $ 263,236
All goodwill is amortized using a straight-line method of amortization based upon the estimated life of the asset and the expense is included in depreciation and amortization expenses. The weighted average amortization period for the goodwill is 10 years. 8.
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Mar 31, 2016
Dec 31, 2015
Accounts payable Accrued taxes payable DCAA reserve Other accrued expenses
$
84,317 5,118 24,366 30,499
$
82,645 5,118 26,766 19,722
Accounts payable and accrued expenses
$
144,299
$
134,251
DEBT On May 11, 2015, the Company acquired all of the outstanding shares of Olive Group Holdings Ltd. for a total purchase price of $215,565, which included $50,000 of Class A Units of the company at fair value. The acquisition was financed through the initial borrowings under a $125,000 asset-based revolving credit facility (“ABL facility”) and the issuance of $450,000 in senior secured notes, which also refinanced our existing senior credit facility, line of credit, and subordinated 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.
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Mar 31, 2016 Credit facilities: ABL credit facility (drawdown) Senior Secured Notes
$
Notes: Minority shareholder notes Replacement notes Subremainder notes
90,000 450,000
892 9,501 34,670
Capital lease
231
Total debt
585,294
Less: original issue discount
1,808 583,486
Less: current portion Total long-term debt
209 $ 583,277
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