Constellis MDA FY15 Q4
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONSTELLIS HOLDINGS, LLC (“CONSTELLIS” OR THE “COMPANY”) UNAUDITED The following discussion and analysis of the Company’s financial condition and results of operations contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Company Overview Constellis provides vertically integrated risk management solutions and complex program management support solutions to government and commercial customers worldwide. Our 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, we create and sustain a secure operational environment and provide analytical services for our customers, which include the U.S. Department of State (“DoS”), the U.S. Department of Defense (“DoD”), the U.S. Department of Energy (“DoE”), the U.S. Intelligence Community (“IC”), foreign governments, non-governmental organizations (“NGOs”) and commercial customers. The Company is headquartered in Reston, Virginia. Basis of Presentation The consolidated financial statements and the notes thereto included elsewhere in this reporting package comprise the financial statements of Constellis and its wholly-owned subsidiaries, prepared in accordance with U.S. GAAP. Pro Forma consolidated results presented on page 8 and thereafter reflect the combined performance of all entities as though all acquisitions occurred prior to January 1, 2014. Recent Acquisitions On May 11, 2015, we acquired 100% of the outstanding stock of Olive Group Holdings Ltd. (“Olive Group”) for total purchase consideration of $236.5 million. This transaction was financed through the initial borrowings under a $125 million ABL facility and the issuance of $450 million in senior secured notes, which also refinanced our existing senior credit facility, line of credit, and subordinated notes. The acquisition of Olive Group provides strategic expansion of our existing service lines into a high-growth commercial customer base. On July 25, 2014, we purchased 100% of the outstanding stock of Constellis Group Inc. (“Triple Canopy”) for total purchase consideration of $253.5 million. We financed this acquisition through the net proceeds from a $290 million senior credit facility and $50 million in subordinated notes. This acquisition was made to broaden our customer base, geographic footprint, service offering and base of contracts, as well as to vertically integrate critical operations functions that allowed us to achieve significant cost efficiencies.
1
Key Components of our Results of Operations Revenues Revenues represent amounts billed on long-term contracts under cost reimbursement, time and material and fixed-price arrangements. Revenues from cost reimbursement contracts are recognized to the extent of costs incurred, plus a proportionate amount of fee earned. Revenues from time and material contracts are based on contractually defined billing rates applied to services performed and material delivered. Revenues from fixed-price contracts are recognized ratably over the period of contractual performance based on a ratio of costs incurred to date and total costs at completion. Cost of Revenues Cost of revenues includes all direct costs consisting of labor, travel, materials, equipment, subcontract, and other costs related to contract performance. Additionally, cost of revenues includes fringe benefit and overhead costs, exclusive of depreciation and amortization, allocable to contracts. Selling, General and Administrative Expenses (“SG&A”) Our selling expenses consist primarily of salaries and other related expenses for our sales and marketing functions. Our general and administrative expenses consist primarily of salaries related to administration, finance, information technology, human resources, legal and compliance functions, as well as other related expenses, such as property costs, communication expenses and utility charges. Depreciation and Amortization Expense Depreciation and amortization expense represents the charge to earnings in respect of property and equipment, and other definite-lived intangible assets we hold. Depreciation expense is charged mainly on a straight-line basis over the useful lives of the respective assets. Amortization expense relates primarily to customer relationships and is amortized using a term based on historical customer attrition rates. Other Income Other income represents income from ancillary services provided at our training and lodging facilities during normal course of operations. Interest Income (Expense) Interest income (expense) represents the interest charge related to borrowings under our prior and existing credit facilities, as well as debt financing and other finance charges related to such borrowings. Results of Operations The following information should be read in conjunction with the information contained in our audited consolidated financial statements and the notes thereto.
2
Operating Results for the Quarter and Twelve Months Ended December 31, 2015 (UNAUDITED) Compared to the Quarter and Twelve Months Ended December 31, 2014 The following table set forth amounts from our consolidated financial statements for the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014: QUARTERS ENDED DECEMBER 31, 2014 Revenues……………………………………………………………………. $
QUARTER V. QUARTER VARIANCE
2015
214.8
$
Cost of revenues…………………………………………………………….. 167.2
$ CHANGE 253.5
$
38.7
% CHANGE 18.0%
208.8
41.6
24.9%
47.6
44.8
(2.9)
(6.0%)
Selling, general and administrative expenses……………………………… 20.6
14.2
(6.4)
(30.9%)
Depreciation and amortization……………………………………..
7.0
11.0
3.9
55.8%
20.0
19.6
(0.4)
(2.1%)
Gross profit……………………………………………………………
Operating income………………………………………………….. Other income (expense) Interest income…………………………………………………….
0.1
(0.3)
(0.4)
(470.2%)
Interest expense…………………………………………………….
(6.3)
(13.1)
(6.8)
109.3%
Loss on extinguishment of debt……………………………………
-
-
-
0.0
0.0
0.0
Net other income (expense)………………………………………..
(6.2)
(13.4)
(7.2)
116.4%
Net income before provision for income tax expense……….
13.8
6.2
(7.6)
(55.1%)
0.0
(7.0)
(99.3%)
6.2
(0.6)
(9.0%)
(0.1)
(78.4%)
(0.5)
(8.2%)
Other income, net……………………………………………….
Total income tax provision…………………………………………………………….. 7.0 Net income (Loss)…………………………………………………….
6.8
Net income attributable to noncontrolling interest…………………………………………… 0.1 Net income (Loss) attributable to Constellis Holdings…… $
6.7
0.0
$
6.1
$
NM NM
The following table set forth amounts from our consolidated financial statements for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014: TWELVE MONTHS ENDED DECEMBER 31, 2014 Revenues……………………………………………………………………. $
YTD V. YTD VARIANCE
2015
581.3
$
$ CHANGE 356.6
61.3%
769.1
302.3
64.8%
114.5
168.9
54.4
47.5%
Selling, general and administrative expenses……………………………… 65.9
73.8
7.9
12.0%
Depreciation and amortization……………………………………..
17.7
36.9
19.1
108.2%
30.9
58.2
27.3
88.3%
Cost of revenues…………………………………………………………….. 466.8 Gross profit……………………………………………………………
Operating income…………………………………………………..
937.9
$
% CHANGE
Other income (expense) Interest income…………………………………………………….
0.2
(0.2)
(0.4)
(238.7%)
Interest expense…………………………………………………….
(9.7)
(41.7)
(31.9)
327.6%
Loss on extinguishment of debt……………………………………
-
(7.5)
(7.5)
0.3
0.6
0.4
155.2%
Net other income (expense)………………………………………..
(9.3)
(48.7)
(39.4)
422.1%
Net income before provision for income tax expense……….
21.6
(56.2%)
Other income, net……………………………………………….
Total income tax provision…………………………………………………………….. 9.8 Net income (Loss)…………………………………………………….
11.8
Net income attributable to noncontrolling interest…………………………………………… 0.1 Net income (Loss) attributable to Constellis Holdings…… $
11.7
3
$
NM
9.4
(12.1)
11.6
1.8
(2.2)
(13.9)
(118.6%)
(0.0)
(0.1)
(153.1%)
(13.8)
(118.4%)
(2.1)
$
18.7%
Revenue. Our total revenues increased $38.7 million, or 18.0%, to $253.5 million for the quarter ended December 31, 2015, as compared to the same period in 2014. This increase was primarily driven by the acquisition of Olive Group on May 11, 2015 and the acquisition of Triple Canopy on July 25, 2014. Our total revenues increased $356.6 million, or 61.3%, to $937.9 million for the twelve months ended December 31, 2015, as compared to the same period in 2014. This increase was primarily driven by the aforementioned acquisitions of Triple Canopy and Olive Group. Cost of revenues. Our cost of revenues increased $41.6 million, or 24.9%, for the quarter ended December 31, 2015, from cost of revenues of $167.2 million for the same period in 2014. Our cost of revenues increased $302.3 million, or 64.8%, for the twelve months end December 31, 2015, from cost of revenues of $466.8 million for the same period in 2014. The increase is primarily driven by the acquisition of Olive Group and Triple Canopy. Other factors include non-recurring contract expenses and retention bonuses. Gross profit. Gross profit for the quarter ended December 31, 2015 decreased by $2.9 million from gross profit of $47.6 million in 2014, a decrease of 6.0%. Gross profit decreased due to non-recurring contract expenses and retention bonuses. Gross profit for the twelve months ended December 31, 2015 increased by $54.4 million from gross profit of $114.5 million in 2014, an increase of 47.5%. The increase was primarily driven by the acquisition of Olive Group and Triple Canopy. Selling, general and administrative expenses. SG&A expenses decreased $6.4 million, or 30.9%, for the quarter ended December 31, 2015, from SG&A expenses of $20.6 million for 2014. SG&A expenses increased $7.9 million, or 12.0%, for the twelve months ended December 31, 2015, from SG&A expenses of $65.9 million for 2014. SG&A expenses expressed as a percentage of revenues decreased to 5.6% for the quarter ended December 31, 2015 from 9.6% in 2014, and to 7.9% for the twelve months ended December 31, 2015 from 11.3% in 2014. The decrease in SG&A as a percentage of revenues is due to cost reductions and synergy efficiencies realized upon the integration of Triple Canopy’s operations post-acquisition in July 2014 and Olive Group’s operations post-acquisition in May 2015. Depreciation and amortization expense. Depreciation and amortization expense increased $3.9 million, or 55.8%, for the quarter ended December 31, 2015, from depreciation and amortization of $7.0 million in 2014. Depreciation and amortization expense increased $19.1 million, or 108.2%, for the twelve months ended December 31, 2015, from depreciation and amortization of $17.7 million in 2014. These increases are primarily the result of a higher base of property and equipment, and other definite-lived intangible assets due to the addition of such assets from the acquisition of Triple Canopy and Olive Group. Other income, net. Other income, net stayed flat for the quarter ended December 31, 2015, from 2014. Other income, net increased $0.4 million, or 155.2% for the twelve months ended December 31, 2015 from 2014. Interest expense, net. Interest expense increased $6.8 million, or 109.3%, for the quarter ended December 31, 2015, from interest expense of $6.3 million for 2014. Interest expense increased $31.9 million, or 327.6%, for the twelve months ended December 31, 2015, from interest expense of $9.7 million for 2014. This increase is due to an increase in borrowings during 2014 and 2015, primarily in relation to the financing of the acquisitions of Triple Canopy and Olive Group.
4
Income tax provision. Income tax provision decreased by $7.0 million for the quarter ended December 31, 2015 from income tax expense of $7.0 million for 2014. Income tax provision increased $1.8 million for the twelve months ended December 31, 2015 from income tax expense of $9.8 million for 2014. The primary drivers of the high effective tax rate relates to the income tax benefits available to the Members of Constellis Holdings LLC resulting from the book losses in the partnership structure and the foreign tax credit generated from foreign taxes accrued by the partnership. The income tax benefits for these amounts are not recorded in the financial statements due to the flow through nature of the partnership structure. Net income (Loss). Net income (Loss) decreased $0.6 million from $6.8 million for the quarter ended December 31, 2014 to $6.2 million for the same period in 2015. Net income (Loss) decreased $13.9 million from $11.8 million for the twelve months ended December 31, 2014 to ($2.2) million the same period in 2015. These decreases were due primarily to higher interest expense, $7.5 million loss on extinguishment of debt related to our refinancing in 2015, and transaction expenses related to the acquisitions of Triple Canopy and Olive Group. Liquidity and Capital Resources Sources and Uses of Liquidity Our primary uses of cash have been to finance our operating cash requirements, service indebtedness and fund capital expenditures. Our primary operating cash requirements are personnel costs, other direct costs, insurance, administrative costs, taxes and capital expenditures. We fund our liquidity needs primarily with cash flow from operations and borrowings under credit facilities. Based on management’s assessment of our business and prospects of future and current economic conditions, we believe that our cash and cash equivalents, cash flows from operations and borrowing base availability under our credit facilities will be adequate to fund our liquidity needs for the next twelve months and beyond. Certain sources and uses of cash, such as the level of discretionary capital expenditures, borrowings and repayment of indebtedness, are generally within our control and are adjusted as necessary based on market conditions. However, our ability to meet our operating cash requirements and service our indebtedness are impacted by many factors outside of our control, including general economic conditions and the level capital expenditures we require in order to support the growth new contract wins from government and commercial customers. ABL Credit Facility Concurrent with the consummation of the Olive Group acquisition in May 2015, we entered an ABL Credit Facility to provide for borrowings and letters of credit of up to the lesser of (a) $125 million and (b) a borrowing base equal to billed receivables plus 60% of eligible unbilled receivables plus 50% of the fair market value of mortgaged property. All obligations under the ABL Credit Facility will be unconditionally guaranteed by our existing and future domestic subsidiaries, subject to certain exceptions. In addition, ERSM (International) Limited and Olive Group, each a business company registered and incorporated in the British Virgin Islands, may borrow up to $40 million of the ABL Credit Facility. Any such borrowings will benefit from the guarantees and the collateral under the ABL Credit Facility. Obligations under the ABL Credit Facility and the related guarantees are secured, subject to certain exceptions, by substantially all of our material owned assets. The ABL Credit Facility contains customary provisions relating to mandatory prepayments, voluntary prepayments, affirmative and negative covenants, including a minimum consolidated interest coverage ratio, and events of default.
5
On August 10, 2015, in accordance with our existing debt agreements, we amended our ABL credit facility by increasing the size of the facility from $125 million to $137.5 million. All other terms of the ABL credit facility were unchanged. Senior Secured Notes due 2020 To fund the Olive Group acquisition and re-finance our existing senior and subordinated indebtedness, we also issued senior secured Notes with an aggregate principal amount of $450.0 million (the “Notes”). The Notes are fully and unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries (other than immaterial subsidiaries), and bear interest at 9.75%. Obligations under the Notes are secured, subject to certain exceptions, by substantially all of our material owned assets. The liens securing the Notes are contractually subordinated to the liens securing the ABL Credit Facility pursuant to an intercreditor agreement. The Notes limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem subordinated indebtedness or make other restricted payments; incur or guarantee additional indebtedness or issue preferred stock; create or incur liens; incur dividend or other payment restrictions affecting our restricted subsidiaries; consummate a merger, consolidation or sale of all or substantially all of our or our subsidiaries’ assets; enter into transactions with affiliates; transfer or sell assets; engage in businesses other than our current business and reasonably related extensions thereof; designate subsidiaries as unrestricted subsidiaries; or take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes. Cash Flows The following table shows our sources and uses of cash for the nine months ended December 31, 2014 and 2015, respectively:
Year Ended December 31 2014 2015 17,104 $ 7,160
Net cash provided by (used in): Operating activities…………………………$ Investing activities………………………….
(192,568)
(234,277)
Financing activities…………………………
180,061
259,898
Total……………………………………….. $
4,598
$
32,781
Operating activities. Net cash used in operating activities increased for the twelve months ended December 31, 2015 compared to 2014. Various changes in working capital resulted in more cash used in operating activities in 2015 than 2014. Investing activities. Net cash used in investing activities increased for the twelve months ended December 31, 2015 as compared to 2014, primarily due to the acquisition of Olive Group. Financing activities. Net cash from financing activities increased for the twelve months ended December 31, 2015 as compared to 2014. This increase was due primarily to the net proceeds received from the issuance of a new ABL credit facility and $450 million senior secured notes,
6
net of repayments of a $100 million revolving credit facility, a $175 million term loan, and a $50,000 second lien term loan. Partly offsetting this net increase in cash from debt financing was a net use of $48 million cash related to equity distributions to existing Constellis shareholders. Capital Expenditures Capital expenditures for twelve ended December 31, 2014 and 2015 were $4.1 million and $10.0 million, respectively. However, on a pro-forma basis, for 2015 capital expenditures are $23 million. These ongoing capital expenditures related primarily to the following uses in operating our business:
Growth capital expenditures (capital expenditures to purchase equipment associated with new contracts and projects that expand our operating capacity); and Maintenance capital expenditures (major capital expenditures for maintaining the usefulness of assets used in supporting our operations, capitalized expenditures on IT systems and software, and leasehold improvements).
7
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION FOR CONSTELLIS HOLDINGS, LLC (UNAUDITED) The following unaudited pro forma combined consolidated financial information is intended to reflect how the acquisitions of Olive Group and Triple Canopy might have impacted our financial statements. Select Operating Data for the Quarter Ended December 31, 2015 Compared to Quarter Ended December 31, 2014 (Pro Forma) QUARTERS ENDED DECEMBER 31, 2014 Revenues………………………………………………………..
QUARTER V. QUARTER VARIANCE
2015 253.5
$
% CHANGE
$
256.9
(3.4)
(1.3%)
Gross profit………………………………………………………..
58.0
48.7
(9.3)
(16.0%)
35.9
21.8
(14.1)
(39.2%)
SG&A………………………………………………………….
$
$ CHANGE
Depreciation and Amortization…………………………………
9.4
7.3
(2.0)
(21.9%)
Total Indirect Expense…………………………………………
45.3
29.2
(16.1)
(35.6%)
Operating Income……………………………………………
12.7
19.6
6.9
53.9%
Interest Expense…………………………………………………
12.6
13.1
0.5
Extinguishment of Debt…………………………………………
-
0.0
0.0
Income Tax Expense……………………………………………
(0.8)
0.0
0.8
Other (income) expense………………………………………..
(0.4)
0.3
0.7
(168.3%)
1.3
6.1
4.9
375.0%
EBITDA………………………………………………………………………..22.5
29.5
7.0
31.3%
(31.1)
(44.5%)
Net Income (Loss)…………………………………………
4.0% NM (105.9%)
Adjustments: Management fees………………………………………………………………….. 1.7
0.8
Non-recurring legal & compliance……………………………………………….. 0.4
0.2
Headcount, facilities & other cost rationalization……………………………………….. 18.4
1.6
Non-recurring contract expenses…………………………………………
1.4
1.0
Non-recurring transaction costs……………………………………………….10.5
0.0
Prior period items & reserves………………………………………………….. 1.3 Non-recurring ESOP expenses……………………………………………………………… 6.2 Loss on extinguishment of debt……………………………………..
-
-
-
Other non-recurring costs…………………………………………………..
4.8
2.1
Operational headcount rationalization………………………………..
1.3
1.8
Facility and infrastructure rationalization……………………………
0.9
1.3
Other indirect cost savings…………………………………………………… 0.3
0.5
Pro Forma Adjusted EBITDA ………………………………………………… $ 69.8
8
$
38.7
$
Select Operating Data for the 12 Months Ended December 31, 2015 Compared to 12 Months Ended December 31, 2014 (Pro Forma) TWELVE MONTHS ENDED DECEMBER 31, 2014 Revenues………………………………………………………..
YTD V. YTD VARIANCE
2015 1,008.3
$
(18.0)
% CHANGE
$
1,026.3
Gross profit………………………………………………………..
231.9
211.6
(20.3)
(8.7%)
143.5
117.0
(26.5)
(18.4%)
SG&A………………………………………………………….
$
$ CHANGE
(1.7%)
Depreciation and Amortization…………………………………
37.3
28.8
(8.5)
(22.7%)
Total Indirect Expense…………………………………………
180.8
145.9
(34.9)
(19.3%)
Operating Income……………………………………………
51.1
65.7
14.6
28.7%
Interest Expense…………………………………………………
50.3
42.8
(7.5)
(15.0%)
Extinguishment of Debt…………………………………………
-
7.5
7.5
NM
Income Tax Expense……………………………………………
3.1
12.0
8.9
292.0%
Other (income) expense………………………………………..
(0.4)
(0.4)
(0.0)
3.9
5.8
Net Income (Loss)…………………………………………
(1.9)
EBITDA………………………………………………………………………..88.8
98.5
4.7% (312.4%)
9.7
10.9%
(11.3)
(6.7%)
Adjustments: Management fees………………………………………………………………….. 3.0
2.4
Non-recurring legal & compliance……………………………………………….. 1.1
0.5
Headcount, facilities & other cost rationalization……………………………………….. 32.9
3.7
Non-recurring contract expenses…………………………………………
1.4
7.2
Non-recurring transaction costs……………………………………………….19.7
7.4
Prior period items & reserves………………………………………………….. 1.3
3.3
Non-recurring ESOP expenses……………………………………………………………… 6.2 Loss on extinguishment of debt……………………………………………
-
7.5
Other non-recurring costs……………………………………………………… 4.8
5.0
Operational headcount rationalization………………………………..
5.1
11.5
Facility and infrastructure rationalization……………………………
3.6
8.1
Other indirect cost savings…………………………………………………… 1.3
2.9
Pro Forma Adjusted EBITDA ………………………………………………… $ 169.2
9
$
157.9
$
The tables below represent Constellis’ revenues by service line during the three and nine months ended September 2015 and 2014: REVENUES BY SERVICE (UNAUDITED): QUARTER ENDED DEC 31, 2014 Security Services………………………………….. $
2015
199.6
$
2015 77.7%
86.8%
26.1
12.6%
10.3%
24.1
6.3
9.4%
2.5%
0.8
1.0
0.3%
0.4%
253.5
100.0%
100.0%
Other…………………………………….. Total……………………………………………. $
2014
220.1
Program Management…………………………………. 32.4 Specialized Training…………………………….
PERCENTAGE OF TOTAL
256.9
$
REVENUES BY SERVICE (UNAUDITED): TWELVE MONTHS ENDED DEC 31, 2014 Security Services………………………………….. $
2015
792.3
2014
2015
874.8
77.2%
86.8%
Program Management………………………………….137.5
91.2
13.4%
9.0%
Specialized Training…………………………….
93.4
40.1
9.1%
4.0%
3.1
2.2
0.3%
0.2%
1,008.3
100.0%
100.0%
Other…………………………………….. Total……………………………………………. $
$
PERCENTAGE OF TOTAL
1,026.3
$
Revenues from security services accounted for $220.1 million, or 86.8%, of revenues for the quarter ended December 31, 2015, as compared to $199.6 million, or 77.7%, of revenues for the same period in 2014. Revenues from program management, specialized training, and other support services accounted for $33.4 million, or 13.2%, of revenue for the quarter ended December 31, 2015, as compared to $57.3 million, or 22.3%, of revenue for the same period in 2014. These changes are due to a change in service mix resulting from a shift in requirements on current contracts. In addition, legacy Academi saw some organic growth from its existing contracts with DoD, DoS, and the intelligence community during 2015 as compared to the same period for 2014. Revenues from security services accounted for $874.8 million, or 86.8%, of revenues for the 12 months ended December 31, 2015, as compared to $792.3 million, or 77.2%, of revenues for the same period in 2014. Revenues from program management, specialized training, and other support services accounted for $133.5 million, or 13.2%, of revenue for the 12 months ended December 31, 2015, as compared to $234.0 million, or 22.8%, of revenue for the same period in 2014. These variations are due to changes in customer requirements on existing contracts. Information Relating to Non-Guarantors In accordance with the Indenture, not all of our subsidiaries guarantee the senior secured notes. On a pro forma combined consolidated basis, non-guarantor subsidiaries (i) generated revenues for the quarter and twelve months ended December 31, 2015 in an aggregate amount equal to $58.9 million and $237.6 million, respectively, which was 23% and 23.5% of our pro forma combined consolidated revenues for such period; (ii) held assets with an aggregate book value of $147.5 million as of December 30, 2015, which was 16.1% of the aggregate book value of the Company’s pro forma combined consolidated assets as of such date.
10
1
Key Components of our Results of Operations Revenues Revenues represent amounts billed on long-term contracts under cost reimbursement, time and material and fixed-price arrangements. Revenues from cost reimbursement contracts are recognized to the extent of costs incurred, plus a proportionate amount of fee earned. Revenues from time and material contracts are based on contractually defined billing rates applied to services performed and material delivered. Revenues from fixed-price contracts are recognized ratably over the period of contractual performance based on a ratio of costs incurred to date and total costs at completion. Cost of Revenues Cost of revenues includes all direct costs consisting of labor, travel, materials, equipment, subcontract, and other costs related to contract performance. Additionally, cost of revenues includes fringe benefit and overhead costs, exclusive of depreciation and amortization, allocable to contracts. Selling, General and Administrative Expenses (“SG&A”) Our selling expenses consist primarily of salaries and other related expenses for our sales and marketing functions. Our general and administrative expenses consist primarily of salaries related to administration, finance, information technology, human resources, legal and compliance functions, as well as other related expenses, such as property costs, communication expenses and utility charges. Depreciation and Amortization Expense Depreciation and amortization expense represents the charge to earnings in respect of property and equipment, and other definite-lived intangible assets we hold. Depreciation expense is charged mainly on a straight-line basis over the useful lives of the respective assets. Amortization expense relates primarily to customer relationships and is amortized using a term based on historical customer attrition rates. Other Income Other income represents income from ancillary services provided at our training and lodging facilities during normal course of operations. Interest Income (Expense) Interest income (expense) represents the interest charge related to borrowings under our prior and existing credit facilities, as well as debt financing and other finance charges related to such borrowings. Results of Operations The following information should be read in conjunction with the information contained in our audited consolidated financial statements and the notes thereto.
2
Operating Results for the Quarter and Twelve Months Ended December 31, 2015 (UNAUDITED) Compared to the Quarter and Twelve Months Ended December 31, 2014 The following table set forth amounts from our consolidated financial statements for the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014: QUARTERS ENDED DECEMBER 31, 2014 Revenues……………………………………………………………………. $
QUARTER V. QUARTER VARIANCE
2015
214.8
$
Cost of revenues…………………………………………………………….. 167.2
$ CHANGE 253.5
$
38.7
% CHANGE 18.0%
208.8
41.6
24.9%
47.6
44.8
(2.9)
(6.0%)
Selling, general and administrative expenses……………………………… 20.6
14.2
(6.4)
(30.9%)
Depreciation and amortization……………………………………..
7.0
11.0
3.9
55.8%
20.0
19.6
(0.4)
(2.1%)
Gross profit……………………………………………………………
Operating income………………………………………………….. Other income (expense) Interest income…………………………………………………….
0.1
(0.3)
(0.4)
(470.2%)
Interest expense…………………………………………………….
(6.3)
(13.1)
(6.8)
109.3%
Loss on extinguishment of debt……………………………………
-
-
-
0.0
0.0
0.0
Net other income (expense)………………………………………..
(6.2)
(13.4)
(7.2)
116.4%
Net income before provision for income tax expense……….
13.8
6.2
(7.6)
(55.1%)
0.0
(7.0)
(99.3%)
6.2
(0.6)
(9.0%)
(0.1)
(78.4%)
(0.5)
(8.2%)
Other income, net……………………………………………….
Total income tax provision…………………………………………………………….. 7.0 Net income (Loss)…………………………………………………….
6.8
Net income attributable to noncontrolling interest…………………………………………… 0.1 Net income (Loss) attributable to Constellis Holdings…… $
6.7
0.0
$
6.1
$
NM NM
The following table set forth amounts from our consolidated financial statements for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014: TWELVE MONTHS ENDED DECEMBER 31, 2014 Revenues……………………………………………………………………. $
YTD V. YTD VARIANCE
2015
581.3
$
$ CHANGE 356.6
61.3%
769.1
302.3
64.8%
114.5
168.9
54.4
47.5%
Selling, general and administrative expenses……………………………… 65.9
73.8
7.9
12.0%
Depreciation and amortization……………………………………..
17.7
36.9
19.1
108.2%
30.9
58.2
27.3
88.3%
Cost of revenues…………………………………………………………….. 466.8 Gross profit……………………………………………………………
Operating income…………………………………………………..
937.9
$
% CHANGE
Other income (expense) Interest income…………………………………………………….
0.2
(0.2)
(0.4)
(238.7%)
Interest expense…………………………………………………….
(9.7)
(41.7)
(31.9)
327.6%
Loss on extinguishment of debt……………………………………
-
(7.5)
(7.5)
0.3
0.6
0.4
155.2%
Net other income (expense)………………………………………..
(9.3)
(48.7)
(39.4)
422.1%
Net income before provision for income tax expense……….
21.6
(56.2%)
Other income, net……………………………………………….
Total income tax provision…………………………………………………………….. 9.8 Net income (Loss)…………………………………………………….
11.8
Net income attributable to noncontrolling interest…………………………………………… 0.1 Net income (Loss) attributable to Constellis Holdings…… $
11.7
3
$
NM
9.4
(12.1)
11.6
1.8
(2.2)
(13.9)
(118.6%)
(0.0)
(0.1)
(153.1%)
(13.8)
(118.4%)
(2.1)
$
18.7%
Revenue. Our total revenues increased $38.7 million, or 18.0%, to $253.5 million for the quarter ended December 31, 2015, as compared to the same period in 2014. This increase was primarily driven by the acquisition of Olive Group on May 11, 2015 and the acquisition of Triple Canopy on July 25, 2014. Our total revenues increased $356.6 million, or 61.3%, to $937.9 million for the twelve months ended December 31, 2015, as compared to the same period in 2014. This increase was primarily driven by the aforementioned acquisitions of Triple Canopy and Olive Group. Cost of revenues. Our cost of revenues increased $41.6 million, or 24.9%, for the quarter ended December 31, 2015, from cost of revenues of $167.2 million for the same period in 2014. Our cost of revenues increased $302.3 million, or 64.8%, for the twelve months end December 31, 2015, from cost of revenues of $466.8 million for the same period in 2014. The increase is primarily driven by the acquisition of Olive Group and Triple Canopy. Other factors include non-recurring contract expenses and retention bonuses. Gross profit. Gross profit for the quarter ended December 31, 2015 decreased by $2.9 million from gross profit of $47.6 million in 2014, a decrease of 6.0%. Gross profit decreased due to non-recurring contract expenses and retention bonuses. Gross profit for the twelve months ended December 31, 2015 increased by $54.4 million from gross profit of $114.5 million in 2014, an increase of 47.5%. The increase was primarily driven by the acquisition of Olive Group and Triple Canopy. Selling, general and administrative expenses. SG&A expenses decreased $6.4 million, or 30.9%, for the quarter ended December 31, 2015, from SG&A expenses of $20.6 million for 2014. SG&A expenses increased $7.9 million, or 12.0%, for the twelve months ended December 31, 2015, from SG&A expenses of $65.9 million for 2014. SG&A expenses expressed as a percentage of revenues decreased to 5.6% for the quarter ended December 31, 2015 from 9.6% in 2014, and to 7.9% for the twelve months ended December 31, 2015 from 11.3% in 2014. The decrease in SG&A as a percentage of revenues is due to cost reductions and synergy efficiencies realized upon the integration of Triple Canopy’s operations post-acquisition in July 2014 and Olive Group’s operations post-acquisition in May 2015. Depreciation and amortization expense. Depreciation and amortization expense increased $3.9 million, or 55.8%, for the quarter ended December 31, 2015, from depreciation and amortization of $7.0 million in 2014. Depreciation and amortization expense increased $19.1 million, or 108.2%, for the twelve months ended December 31, 2015, from depreciation and amortization of $17.7 million in 2014. These increases are primarily the result of a higher base of property and equipment, and other definite-lived intangible assets due to the addition of such assets from the acquisition of Triple Canopy and Olive Group. Other income, net. Other income, net stayed flat for the quarter ended December 31, 2015, from 2014. Other income, net increased $0.4 million, or 155.2% for the twelve months ended December 31, 2015 from 2014. Interest expense, net. Interest expense increased $6.8 million, or 109.3%, for the quarter ended December 31, 2015, from interest expense of $6.3 million for 2014. Interest expense increased $31.9 million, or 327.6%, for the twelve months ended December 31, 2015, from interest expense of $9.7 million for 2014. This increase is due to an increase in borrowings during 2014 and 2015, primarily in relation to the financing of the acquisitions of Triple Canopy and Olive Group.
4
Income tax provision. Income tax provision decreased by $7.0 million for the quarter ended December 31, 2015 from income tax expense of $7.0 million for 2014. Income tax provision increased $1.8 million for the twelve months ended December 31, 2015 from income tax expense of $9.8 million for 2014. The primary drivers of the high effective tax rate relates to the income tax benefits available to the Members of Constellis Holdings LLC resulting from the book losses in the partnership structure and the foreign tax credit generated from foreign taxes accrued by the partnership. The income tax benefits for these amounts are not recorded in the financial statements due to the flow through nature of the partnership structure. Net income (Loss). Net income (Loss) decreased $0.6 million from $6.8 million for the quarter ended December 31, 2014 to $6.2 million for the same period in 2015. Net income (Loss) decreased $13.9 million from $11.8 million for the twelve months ended December 31, 2014 to ($2.2) million the same period in 2015. These decreases were due primarily to higher interest expense, $7.5 million loss on extinguishment of debt related to our refinancing in 2015, and transaction expenses related to the acquisitions of Triple Canopy and Olive Group. Liquidity and Capital Resources Sources and Uses of Liquidity Our primary uses of cash have been to finance our operating cash requirements, service indebtedness and fund capital expenditures. Our primary operating cash requirements are personnel costs, other direct costs, insurance, administrative costs, taxes and capital expenditures. We fund our liquidity needs primarily with cash flow from operations and borrowings under credit facilities. Based on management’s assessment of our business and prospects of future and current economic conditions, we believe that our cash and cash equivalents, cash flows from operations and borrowing base availability under our credit facilities will be adequate to fund our liquidity needs for the next twelve months and beyond. Certain sources and uses of cash, such as the level of discretionary capital expenditures, borrowings and repayment of indebtedness, are generally within our control and are adjusted as necessary based on market conditions. However, our ability to meet our operating cash requirements and service our indebtedness are impacted by many factors outside of our control, including general economic conditions and the level capital expenditures we require in order to support the growth new contract wins from government and commercial customers. ABL Credit Facility Concurrent with the consummation of the Olive Group acquisition in May 2015, we entered an ABL Credit Facility to provide for borrowings and letters of credit of up to the lesser of (a) $125 million and (b) a borrowing base equal to billed receivables plus 60% of eligible unbilled receivables plus 50% of the fair market value of mortgaged property. All obligations under the ABL Credit Facility will be unconditionally guaranteed by our existing and future domestic subsidiaries, subject to certain exceptions. In addition, ERSM (International) Limited and Olive Group, each a business company registered and incorporated in the British Virgin Islands, may borrow up to $40 million of the ABL Credit Facility. Any such borrowings will benefit from the guarantees and the collateral under the ABL Credit Facility. Obligations under the ABL Credit Facility and the related guarantees are secured, subject to certain exceptions, by substantially all of our material owned assets. The ABL Credit Facility contains customary provisions relating to mandatory prepayments, voluntary prepayments, affirmative and negative covenants, including a minimum consolidated interest coverage ratio, and events of default.
5
On August 10, 2015, in accordance with our existing debt agreements, we amended our ABL credit facility by increasing the size of the facility from $125 million to $137.5 million. All other terms of the ABL credit facility were unchanged. Senior Secured Notes due 2020 To fund the Olive Group acquisition and re-finance our existing senior and subordinated indebtedness, we also issued senior secured Notes with an aggregate principal amount of $450.0 million (the “Notes”). The Notes are fully and unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries (other than immaterial subsidiaries), and bear interest at 9.75%. Obligations under the Notes are secured, subject to certain exceptions, by substantially all of our material owned assets. The liens securing the Notes are contractually subordinated to the liens securing the ABL Credit Facility pursuant to an intercreditor agreement. The Notes limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem subordinated indebtedness or make other restricted payments; incur or guarantee additional indebtedness or issue preferred stock; create or incur liens; incur dividend or other payment restrictions affecting our restricted subsidiaries; consummate a merger, consolidation or sale of all or substantially all of our or our subsidiaries’ assets; enter into transactions with affiliates; transfer or sell assets; engage in businesses other than our current business and reasonably related extensions thereof; designate subsidiaries as unrestricted subsidiaries; or take or omit to take any actions that would adversely affect or impair in any material respect the collateral securing the Notes. Cash Flows The following table shows our sources and uses of cash for the nine months ended December 31, 2014 and 2015, respectively:
Year Ended December 31 2014 2015 17,104 $ 7,160
Net cash provided by (used in): Operating activities…………………………$ Investing activities………………………….
(192,568)
(234,277)
Financing activities…………………………
180,061
259,898
Total……………………………………….. $
4,598
$
32,781
Operating activities. Net cash used in operating activities increased for the twelve months ended December 31, 2015 compared to 2014. Various changes in working capital resulted in more cash used in operating activities in 2015 than 2014. Investing activities. Net cash used in investing activities increased for the twelve months ended December 31, 2015 as compared to 2014, primarily due to the acquisition of Olive Group. Financing activities. Net cash from financing activities increased for the twelve months ended December 31, 2015 as compared to 2014. This increase was due primarily to the net proceeds received from the issuance of a new ABL credit facility and $450 million senior secured notes,
6
net of repayments of a $100 million revolving credit facility, a $175 million term loan, and a $50,000 second lien term loan. Partly offsetting this net increase in cash from debt financing was a net use of $48 million cash related to equity distributions to existing Constellis shareholders. Capital Expenditures Capital expenditures for twelve ended December 31, 2014 and 2015 were $4.1 million and $10.0 million, respectively. However, on a pro-forma basis, for 2015 capital expenditures are $23 million. These ongoing capital expenditures related primarily to the following uses in operating our business:
Growth capital expenditures (capital expenditures to purchase equipment associated with new contracts and projects that expand our operating capacity); and Maintenance capital expenditures (major capital expenditures for maintaining the usefulness of assets used in supporting our operations, capitalized expenditures on IT systems and software, and leasehold improvements).
7
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION FOR CONSTELLIS HOLDINGS, LLC (UNAUDITED) The following unaudited pro forma combined consolidated financial information is intended to reflect how the acquisitions of Olive Group and Triple Canopy might have impacted our financial statements. Select Operating Data for the Quarter Ended December 31, 2015 Compared to Quarter Ended December 31, 2014 (Pro Forma) QUARTERS ENDED DECEMBER 31, 2014 Revenues………………………………………………………..
QUARTER V. QUARTER VARIANCE
2015 253.5
$
% CHANGE
$
256.9
(3.4)
(1.3%)
Gross profit………………………………………………………..
58.0
48.7
(9.3)
(16.0%)
35.9
21.8
(14.1)
(39.2%)
SG&A………………………………………………………….
$
$ CHANGE
Depreciation and Amortization…………………………………
9.4
7.3
(2.0)
(21.9%)
Total Indirect Expense…………………………………………
45.3
29.2
(16.1)
(35.6%)
Operating Income……………………………………………
12.7
19.6
6.9
53.9%
Interest Expense…………………………………………………
12.6
13.1
0.5
Extinguishment of Debt…………………………………………
-
0.0
0.0
Income Tax Expense……………………………………………
(0.8)
0.0
0.8
Other (income) expense………………………………………..
(0.4)
0.3
0.7
(168.3%)
1.3
6.1
4.9
375.0%
EBITDA………………………………………………………………………..22.5
29.5
7.0
31.3%
(31.1)
(44.5%)
Net Income (Loss)…………………………………………
4.0% NM (105.9%)
Adjustments: Management fees………………………………………………………………….. 1.7
0.8
Non-recurring legal & compliance……………………………………………….. 0.4
0.2
Headcount, facilities & other cost rationalization……………………………………….. 18.4
1.6
Non-recurring contract expenses…………………………………………
1.4
1.0
Non-recurring transaction costs……………………………………………….10.5
0.0
Prior period items & reserves………………………………………………….. 1.3 Non-recurring ESOP expenses……………………………………………………………… 6.2 Loss on extinguishment of debt……………………………………..
-
-
-
Other non-recurring costs…………………………………………………..
4.8
2.1
Operational headcount rationalization………………………………..
1.3
1.8
Facility and infrastructure rationalization……………………………
0.9
1.3
Other indirect cost savings…………………………………………………… 0.3
0.5
Pro Forma Adjusted EBITDA ………………………………………………… $ 69.8
8
$
38.7
$
Select Operating Data for the 12 Months Ended December 31, 2015 Compared to 12 Months Ended December 31, 2014 (Pro Forma) TWELVE MONTHS ENDED DECEMBER 31, 2014 Revenues………………………………………………………..
YTD V. YTD VARIANCE
2015 1,008.3
$
(18.0)
% CHANGE
$
1,026.3
Gross profit………………………………………………………..
231.9
211.6
(20.3)
(8.7%)
143.5
117.0
(26.5)
(18.4%)
SG&A………………………………………………………….
$
$ CHANGE
(1.7%)
Depreciation and Amortization…………………………………
37.3
28.8
(8.5)
(22.7%)
Total Indirect Expense…………………………………………
180.8
145.9
(34.9)
(19.3%)
Operating Income……………………………………………
51.1
65.7
14.6
28.7%
Interest Expense…………………………………………………
50.3
42.8
(7.5)
(15.0%)
Extinguishment of Debt…………………………………………
-
7.5
7.5
NM
Income Tax Expense……………………………………………
3.1
12.0
8.9
292.0%
Other (income) expense………………………………………..
(0.4)
(0.4)
(0.0)
3.9
5.8
Net Income (Loss)…………………………………………
(1.9)
EBITDA………………………………………………………………………..88.8
98.5
4.7% (312.4%)
9.7
10.9%
(11.3)
(6.7%)
Adjustments: Management fees………………………………………………………………….. 3.0
2.4
Non-recurring legal & compliance……………………………………………….. 1.1
0.5
Headcount, facilities & other cost rationalization……………………………………….. 32.9
3.7
Non-recurring contract expenses…………………………………………
1.4
7.2
Non-recurring transaction costs……………………………………………….19.7
7.4
Prior period items & reserves………………………………………………….. 1.3
3.3
Non-recurring ESOP expenses……………………………………………………………… 6.2 Loss on extinguishment of debt……………………………………………
-
7.5
Other non-recurring costs……………………………………………………… 4.8
5.0
Operational headcount rationalization………………………………..
5.1
11.5
Facility and infrastructure rationalization……………………………
3.6
8.1
Other indirect cost savings…………………………………………………… 1.3
2.9
Pro Forma Adjusted EBITDA ………………………………………………… $ 169.2
9
$
157.9
$
The tables below represent Constellis’ revenues by service line during the three and nine months ended September 2015 and 2014: REVENUES BY SERVICE (UNAUDITED): QUARTER ENDED DEC 31, 2014 Security Services………………………………….. $
2015
199.6
$
2015 77.7%
86.8%
26.1
12.6%
10.3%
24.1
6.3
9.4%
2.5%
0.8
1.0
0.3%
0.4%
253.5
100.0%
100.0%
Other…………………………………….. Total……………………………………………. $
2014
220.1
Program Management…………………………………. 32.4 Specialized Training…………………………….
PERCENTAGE OF TOTAL
256.9
$
REVENUES BY SERVICE (UNAUDITED): TWELVE MONTHS ENDED DEC 31, 2014 Security Services………………………………….. $
2015
792.3
2014
2015
874.8
77.2%
86.8%
Program Management………………………………….137.5
91.2
13.4%
9.0%
Specialized Training…………………………….
93.4
40.1
9.1%
4.0%
3.1
2.2
0.3%
0.2%
1,008.3
100.0%
100.0%
Other…………………………………….. Total……………………………………………. $
$
PERCENTAGE OF TOTAL
1,026.3
$
Revenues from security services accounted for $220.1 million, or 86.8%, of revenues for the quarter ended December 31, 2015, as compared to $199.6 million, or 77.7%, of revenues for the same period in 2014. Revenues from program management, specialized training, and other support services accounted for $33.4 million, or 13.2%, of revenue for the quarter ended December 31, 2015, as compared to $57.3 million, or 22.3%, of revenue for the same period in 2014. These changes are due to a change in service mix resulting from a shift in requirements on current contracts. In addition, legacy Academi saw some organic growth from its existing contracts with DoD, DoS, and the intelligence community during 2015 as compared to the same period for 2014. Revenues from security services accounted for $874.8 million, or 86.8%, of revenues for the 12 months ended December 31, 2015, as compared to $792.3 million, or 77.2%, of revenues for the same period in 2014. Revenues from program management, specialized training, and other support services accounted for $133.5 million, or 13.2%, of revenue for the 12 months ended December 31, 2015, as compared to $234.0 million, or 22.8%, of revenue for the same period in 2014. These variations are due to changes in customer requirements on existing contracts. Information Relating to Non-Guarantors In accordance with the Indenture, not all of our subsidiaries guarantee the senior secured notes. On a pro forma combined consolidated basis, non-guarantor subsidiaries (i) generated revenues for the quarter and twelve months ended December 31, 2015 in an aggregate amount equal to $58.9 million and $237.6 million, respectively, which was 23% and 23.5% of our pro forma combined consolidated revenues for such period; (ii) held assets with an aggregate book value of $147.5 million as of December 30, 2015, which was 16.1% of the aggregate book value of the Company’s pro forma combined consolidated assets as of such date.
10
