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By Nick Wakeman

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Nick Wakeman

Engility near growth as acquisition by SAIC gets closer

As Engility heads toward the January closure of its $2.5 billion acquisition by Science Applications International Corp., CEO Lynn Dugle is still out visiting employees.

She was in Colorado on Monday and was headed to Panama City Florida, Wednesday night.

The company has seen little change in attrition since the deal was announced in September but it is very much on employees’ minds.

“I’m really explaining why sell the company now and how [a sale] accelerates our strategy,” she said Wednesday during what likely is Engility's last quarterly call with Wall Street analysts.

One benefit is that Engility will be part of a larger organization, so cost synergies from that added scale can help make it more competitive. “We’ll get cost out of the deal and incrementally that can never hurt you,” she said.

But there also is what Engility didn’t have before.

“For us at Engility, IT solutions are part of everything we bid but we always had to partner for that,” Dugle said. “Now the next time we go for a large high-performance computing contract, we don’t have to team for help desk because we’ve got that within the confines of our company.”

Integration with SAIC has already begun some, in part because of the familiarity between the two companies. “SAIC has done a really exceptional job in welcoming us,” she said.

For example, SAIC hosted a large technology conference and invited Engility’s solution architects to it. “There is a lot of buzz around coming together about mixing our solutions and co-investing in things,” Dugle said.

Areas she expects to see increased investment at the larger SAIC include artificial intelligence, machine learning, cybersecurity and operations, IT modernization and digital engineering.

The new SAIC will have 23,000 employees with 16,000 of those with security clearances. The new company will have double the number of IDIQ contracts, which will grow from 75 to 150.

In its third quarter, Engility reported $471.2 million in revenue, compared to $487.1 million over the same period last year. For the nine months ended Sept. 28, the company had $1.4 billion in revenue compared to $1.5 billion in last year's timeframe.

But despite the flat revenue, Dugle said the company had the highest book-to-bill ratio in company history at 2.4x. The book-to-bill ratio is a strong indicator of future growth if it exceeds 1.

Dugle said that three sectors of Engility – defense, intelligence and space – all met or exceeded revenue, bookings and profit targets. The company also won three large contracts with each worth more than $100 million.

Those factors put Engility on track to return to organic growth in 2019 when it is part of SAIC, Dugle said.

Wednesday’s investor’s call is likely the last for Engility as an independent company and it looks much different than when Dugle took over in 2016.

The company was spun out of L-3 Communications in 2012 to be a player in a market dominated by lowest price, technically acceptable contracts. It was cast to be the leading low-cost provider of systems engineering and technical services to the government.

But by 2014, that business case wasn’t valid -- if it ever was -- and the company needed to change as the market shifted. It acquired TASC in early 2015 to add deeper, higher-end systems engineering skills for space and intelligence customers.

But change wasn’t coming fast enough, and Dugle, a former Raytheon executive, made the shift from board member to CEO in March 2016.

The company made a hard break from the world of LPTA and by 2017, Dugle said that 99 percent of its work was non-LPTA, a percentage the company has maintained.

But the shift had an impact on more than just the type of contracts Engility pursued. I often think about what Dugle told me last year about how the kinds of contracts and work a company pursues has an impact across the organization, from benefits to incentives to investments to who you hire.

“It really touches your DNA when your basis of competition is the price tag instead of looking at your mission experience and the outcome you’ve delivered,” Dugle said of the LPTA world.

Moving away from LPTA meant changing business development and capture, incentivizing employees differently, and taking a deep look at what the company is really good at and what it delivers to customers, she said.

I’m sure there are others things she probably wanted to accomplish. Organic growth has still not returned though indications are it is close. But SAIC still saw value in Engility. The $2.5 billion acquisition includes an assumption of $900 million in debt and a 11.5-percent premium for Engility shares. Engility shareholders will retain a 28 percent stake in the new SAIC. That indicates of their confidence in the combination.

Dugle took a moment before the question-and-answer portion of the earnings call to reflect on Engility’s journey.

“I want to close by saying how extremely proud and exceptionally grateful I am to each member of the Engility team,” she said. “Thank you for all of your ideas, energy and commitment and for all the hours you spent away from friends and family to redesign a company that just three years ago was shrinking by double digits and transforming it in to a company that will return to growth in 2019.”

She said Engility is looking forward to the combination with SAIC because of their complimentary capabilities, similar cultures and passion for the customers mission.

But she wants Engility employees to “take a moment and reflect on all that you have accomplished. It was a pretty amazing thing.”

Posted by Nick Wakeman on Oct 31, 2018 at 11:03 AM


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