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Edited Transcript of EGL earnings conference call or presentation 9-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Engility Holdings Inc Earnings Call

Chantilly Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Engility Holdings Inc earnings conference call or presentation Thursday, March 9, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Spille

Engility Holdings, Inc. - VP IR, Corporate Communications

* Lynn Dugle

Engility Holdings, Inc. - CEO

* Wayne Rehberger

Engility Holdings, Inc. - SVP and CFO

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Conference Call Participants

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* Kwan Kim

SunTrust Robinson Humphrey - Analyst

* Brian Kinstlinger

Maxim Group - Analyst

* Lucy Guo

Cowen and Company - Analyst

* Brian Ruttenbur

Drexel Hamilton - Analyst

* Tobey Sommer

SunTrust Robinson Humphrey - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the fourth quarter 2016 Engility Holdings, Inc. earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference ever to your host for today, Dave Spille, Vice President of Investor Relations. You may begin.

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Dave Spille, Engility Holdings, Inc. - VP IR, Corporate Communications [2]

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Good morning and thank you for joining us today to discuss our fourth-quarter and full-year 2016 financial results. Please note that we have provided presentation slides on the Investor Relations section of our website. On the call with me today are Lynn Dugle, Chief Executive Officer, and Wayne Rehberger, Senior Vice President and Chief Financial Officer.

Today, Lynn will provide an overview of our operating results for the quarter, and then Wayne will discuss our fourth-quarter financial results and our outlook for 2017. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the Company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements, due to a variety of factors. These risks are outlined in our Form 10-K and other SEC filings, and we do not undertake any obligation to update forward-looking statements.

Management will also make reference to non-GAAP financial measures during this call, and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. I now will turn the call over to Lynn.

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Lynn Dugle, Engility Holdings, Inc. - CEO [3]

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Thank you, Dave, and good morning, everyone. Today, Wayne and I will share our fourth-quarter and full-year 2016 results, as well as our outlook for 2017. But first let me quickly reflect on the Engility journey over the last two years. In 2015, the transformative acquisition of TASC doubled the size of the Company and expanded our expertise and presence into well-funded areas that included space, intelligence, and the federal civilian market. We finished 2015 by successfully integrating these two complementary billion dollar businesses on time and on budget.

And as we entered 2016, we positioned for growth by investing in our business and adjusting our business model from LPTA to best value. Engility now has the ability to leverage our increased scale and capabilities to bid on larger contracts, attract key talent, and compete in new markets.

Also during the year, we established three strategic priorities: to achieve sustainable organic revenue growth, attract, retain and grow our talent, and strengthen our balance sheet. And let me briefly recap our progress to date. First, and most importantly, we improved our revenue trajectory. We increase the value of our contract awards by 62% and our total backlog by 18%. This also drove an increase in our book-to-bill ratio from 0.8 in 2015 to 1.3 in 2016, achieving our goal of better than 1.0 book to bill.

We also demonstrated our ability to win larger programs. In 2016, we won four programs, each worth $200 million or more, including the largest contract in our company's history. This compares to only one contract win in excess of $200 million since Engility's inception in 2012.

We also took an initial hard look at our portfolio, divesting ourselves of our IRG business which was no longer a strategic fit for the Company.

Second, we made substantial progress on our human capital initiative. We attracted new leadership to the company, strengthening our contracts, communication, human resources, business development, and Army teams. In addition, we invested in our employees. We improved our benefits and enhanced our training and development program. This has rejuvenated our ability to build highly technical and high-performing teams, and these initiatives demonstrate our commitment to our employees and have led to an increase in employee engagement and new higher referral rates.

Finally, we significantly strengthened our balance sheet. Our recent debt refinancing and repricing initiatives will reduce our annualized interest expense by approximately $31 million, based on outstanding debt levels at the time of the transaction. This positions us well to generate strong cash flow in 2017, and accelerate our debt paydown.

Today, we stand with an improved balance sheet and the capacity and flexibility to grow our business. In summary, we achieved measurable results across many fronts and I feel good about our progress and the momentum that is building within the Company.

That said, we have more work in front of us and challenges remain. We've clearly defined those challenges and have a detailed plan to address them. First, we must stabilize our defense business. We are in the process of hiring a DoD leader with a proven track record on business growth and who will have the experience, industry and customer relationships and expertise we need to grow this business, strategically shifting it to higher end markets such as cyber security and other areas where we can differentiate our solutions.

We must build upon our recent business development and capture successes, and expand our efforts to include the maximization of our current portfolio of IDIQ vehicles. Improvements in this process began last summer, and we recently hired a seasoned executive to focus exclusively on our IDIQ portfolio. This is an opportunity we have not historically exploited in the past, and will have a near-term bookings impact.

We must also work proactively with our customers to more quickly transition programs that we take away from our competitors, and address small business challenges through influencing contract types or more aggressively teaming with small business.

Finally, we are in relentless pursuit of organic growth. At the same time, we have taken a prudent approach to guidance, one that acknowledges the reality of a competitive marketplace, continued protests, and slow starts on large takeaway contract wins. It's important to note that although we are encouraged that many of the Trump administration's stated priorities, military readiness, homeland security, and modernizing our country's infrastructure are consistent with Engility's strength, our guidance does not assume any positive impact in 2017.

To close, we are excited about the opportunities which lie ahead for Engility, and we look forward to keeping you apprised of our progress. With that, let me ask Wayne to spend a few minutes reviewing the results of the fourth quarter and outlining our view of 2017. Wayne.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [4]

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Thank you, Lynn, and good morning, everybody. As you can see from today's press release, we are reporting revenue, cash flow, and adjusted profitability results within our fiscal 2016 guidance ranges. Our GAAP diluted EPS includes a $10 million non-cash goodwill charge we disclosed in January, which relates to the sale of our International Resources Group, which we refer to as IRG.

As we have done on previous earnings calls, we will discuss certain financial results on an adjusted basis when we believe they provide meaningful comparisons to our prior and future financial results. GAAP reconciliation tables are provided in the press release we issued this morning.

Our fourth-quarter 2016 was highlighted by an adjusted EBITDA of $47 million, cash flow from operations of $10 million, total debt payments of $17 million, adjusted diluted EPS of $0.51, and a book-to-bill ratio of 0.92. For the full year, we reported annual revenue of $2.1 billion, adjusted EBITDA of $189 million, cash flow from operations of $94 million, total debt payment of $91 million, an adjusted diluted EPS of $1.61 and a book-to-bill ratio of 1.3 times.

In discussing the details of our fourth-quarter results, I will separate my remarks into five key areas: the income statement, cash flow statement, balance sheet, contract awards and our guidance. First, we reported fourth-quarter revenue of $506 million, which was slightly below our expectations due to protests, slow ramp-up on recent large wins, and some award delays in our products group.

GAAP SG&A costs for the fourth quarter were $36 million, a $3 million sequential decrease from the third quarter. This decrease was driven primarily by a benefit from the early termination of a lease, offset in part by some integration-related expenses. Our fourth-quarter adjusted operating margin was 8.2% and our adjusted EBITDA margin was 9.2%, which was in line with our fourth-quarter expectations.

On a GAAP basis, we recorded a tax benefit of approximately $5 million in the fourth quarter. This was driven in part by our $10 million goodwill charge. For the full year, we paid approximately $1 million in cash taxes and, again, we expect this will continue for the next 6 to 7 years.

Our fourth-quarter 2016 adjusted net income was approximately $19 million, or $0.51 per diluted share.

Now I will turn to the balance sheet and cash flow metrics. Our DSO for the quarter was 56 days, which is consistent with last quarter and the fourth quarter of 2015. We continue to expect DSOs to remain in the 55- to 60-day range over the longer term.

During the fourth quarter, we generated operating cash flow of $10 million and for the full year, we generated $94 million. Our strong cash flow enabled us to make total debt payments of $91 million in fiscal year 2016, and at the end of 2016, our leverage ratio on our senior secured debt was 3.73 times adjusted bank EBITDA which is significantly below our covenant ratio of 6.125 times.

In 2016, we further strengthened our balance sheet by refinancing our debt at more attractive interest rates, reducing our annual interest expense by $23 million. Then in February 2017, we repriced our credit facility, reducing our annual interest expense by an additional $8 million, both on an annualized basis.

And sticking with the theme of paying down debt, at the beginning of the first quarter of 2017, we used $20 million of our US IRG divestiture proceeds to repay outstanding debt.

Now I will discuss a few more key performance indicators, including awards, book to bill and backlog. During the fourth quarter we reported contract awards of $466 million. This represents a quarterly book-to-bill ratio of 0.9 and brought our full-year book-to-bill ratio to 1.3, which exceeded our objective of being over 1 for the full year of 2016. We ended the fourth quarter with total backlog of $3.6 billion, an 18% increase from the $3.1 billion we reported at the end of 2015.

As many of you are aware, going forward we will be providing guidance for revenue, GAAP EPS, operating cash flow and EBITDA, since our non-GAAP adjustments have stabilized with the near completion of integration activities following our DRC and TASC acquisitions. In addition, we will provide with our quarterly results and our full-year estimates for acquisition amortization expenses and restructuring costs. This will enable you to compare current results to historical results and derive consistent valuation comparisons across the industry.

In establishing our guidance for 2017, we took a prudent approach developing our forecast, and are confident in our ability to achieve results within our anticipated ranges. For fiscal year 2017, we expect revenue to be between $1.95 billion and $2.05 billion. As a result, we expect 2017 organic revenue to be relatively flat at the midpoint of our guidance range. This compares to a pro-forma organic revenue decline of approximately negative 5% in 2016 when excluding IRG revenue from 2015 and 2016.

The stabilization in our organic revenue is being driven by an increase in our fiscal year 2016 contract awards that Lynn has mentioned, a stable OCO revenue base, better macro environment, and diminishing impact of revenue reductions from contracts that have ended or been reduced in scope.

Our revenue guidance assumes 6% of our revenue will be generated from new business, 6% from recompete awards, and 88% from our existing business base.

GAAP diluted EPS is expected to be between $0.75 and $0.85 per diluted share. This range includes approximately $25 million in acquisition-related amortization and $3 million of restructuring and integration expenses. The growth in our earnings per share is being driven primarily by our lower interest expense in 2017.

Our EBITDA guidance range is expected to be between $173 million and $183 million, and this range includes approximately $3 million of restructuring and integration expenses.

2017 cash flow from operations is expected to be between $95 million and $105 million. This guidance includes the net impact from timing change around our 401(k) payments, offset by a reduction in our debt refinancing fees.

For GAAP diluted EPS, we expect approximately 40% to 45% of our annualized EPS to be generated in the first half of 2017, and the remainder in the second half of the year. We also expect sequential or quarter-to-quarter increases in both revenue and profitability results throughout the year.

As a starting point for 2017, we expect first-quarter revenue to be approximately $470 million to $475 million. This reduction from the fourth quarter of 2016 is primarily due to our IRG divestiture, delayed contract starts due to protests, slower TASC order releases on our [ATEP] wins, and a couple recent new business contract losses. Other key assumptions in our 2017 guidance are outlined in detail on slide 11 of today's PowerPoint presentation.

With that, I will turn the call back over to Lynn for closing remarks before we take questions.

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Lynn Dugle, Engility Holdings, Inc. - CEO [5]

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Thanks, Wayne. To close, 2016 was a successful year for Engility on many fronts. We increased our book-to-bill ratio, continued to build backlog, and demonstrated our ability to win larger contracts and to take away business from our competitors. We built a stronger team and our employees are motivated and mobilized to win and grow. We are confident in our ability to continuously improve our performance and to achieve our stated goals in 2017.

Now we will open up the line to take your questions. Operator, can you please explain the Q&A process?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Tobey Sommer, SunTrust.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [2]

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Good morning. This is Kwan Kim on for Tobey. Thank you for taking my questions. First off, could you talk about the relative importance of LPTA contracts today versus a year ago and previous quarters, and what the contract mix may look like for 2017? Thank you.

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Lynn Dugle, Engility Holdings, Inc. - CEO [3]

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Yes. We continue to drive LPTA to a very, very small piece of our business. Obviously, our average contract length runs 3 to 4 years, and we need to continue to clean out that backlog. I think as we talked about in the last quarter's call, we are shifting those contracts to best value. Well over 95% of the contracts we submitted in 2016 were best value. So it's a very small portion of our business.

As far as business mix, relatively stable 2015 to 2016. About 60% cost plus, 21% fixed price, and 18.5% on T&M. So that was slightly -- about 2% higher in cost plus, which we had indicated during the year that we thought we would see; a very small shift from our T&M business into the cost plus.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [4]

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Thank you. Among your new customers, were there any particularly large customers that generated higher levels of contract activity than usual in your experience?

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Lynn Dugle, Engility Holdings, Inc. - CEO [5]

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Could you repeat -- were there any customers that did what?

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [6]

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That generated higher levels of contract activity than usual.

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Lynn Dugle, Engility Holdings, Inc. - CEO [7]

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There's nothing that really jumps to mind. We have a normal ebb and flow based on our recompete cycles, but nothing of note.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [8]

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okay. What are you seeing in terms of protest activity? Has there been any noteworthy changes there so far in 2017?

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Lynn Dugle, Engility Holdings, Inc. - CEO [9]

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Yes, and thank you for the question. Certainly, coming into 2016, we had a very active protest environment. One of the things that frankly surprised me was that every takeaway program that we won, so 100% of them, were protested. We certainly anticipated some being protested, but not all. So that, of course, is one year and somewhat anecdotal, but I think that protests as far as we look at 2017, we will now assume that anything that is a takeaway will be protested.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [10]

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And just to add, we have one won contract right now under protest, and we recently won another takeaway that is too early to tell whether it will be protested. Hoping that maybe it won't be 100% this year.

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Lynn Dugle, Engility Holdings, Inc. - CEO [11]

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I was going to say, maybe we can break the pattern.

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Kwan Kim, SunTrust Robinson Humphrey - Analyst [12]

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Thank you very much.

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Operator [13]

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Brian Kinstlinger, Maxim Group.

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Brian Kinstlinger, Maxim Group - Analyst [14]

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Great, thank you. A follow-up on that. Can you quantify the size of the protest, for example, on an annual revenue contribution; how large is it and was it in reported bookings?

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Lynn Dugle, Engility Holdings, Inc. - CEO [15]

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If it was in reported bookings --.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [16]

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Yes. So we go ahead and if we reported anything in bookings, and I think we have one smaller contract in bookings that was protested, we would highlight that in our reporting in our Q or K. Today in the bookings that we reported for the fourth quarter, there's nothing in there that is under protest. There is, again, one won program that is under protest that's worth $60-ish million. That is not in the bookings number.

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Brian Kinstlinger, Maxim Group - Analyst [17]

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That $60 million, is it an annual basis or total contract value?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [18]

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I'm sorry, it was total contract for four years.

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Brian Kinstlinger, Maxim Group - Analyst [19]

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And then when you look at your contract awards in the fourth quarter and for the year, can you provide the calculation for roughly what is new and/or existing -- expansion of existing work?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [20]

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Yes. So for new business, we had basically --

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Lynn Dugle, Engility Holdings, Inc. - CEO [21]

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About 27%.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [22]

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-- about 27%, yes.

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Brian Kinstlinger, Maxim Group - Analyst [23]

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For the year or for the quarter, sorry?

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Lynn Dugle, Engility Holdings, Inc. - CEO [24]

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For the year. And to see that -- we normally don't focus on the quarter to quarter because you can get such big swings, especially -- historically, when Engility contracts that we pursued were much smaller, that evened out. Now that as you go for much larger contracts of in excess of $200 million, you see much more variability quarter to quarter.

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Brian Kinstlinger, Maxim Group - Analyst [25]

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Right. Lynn, at a recent investor conference you mentioned your peers are talking about much stronger topline growth in 2017, which I think to quote you was a bit optimistic. But still, some of those companies are growing now and I think the midpoint of your guidance is a marginal decline.

Can you just talk about how since you have joined, the BD process has changed as it relates to takeaways and the progress you think you're making?

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Lynn Dugle, Engility Holdings, Inc. - CEO [26]

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Yes, and thank you for the question. We have made a lot of changes. I think I've categorized them; in 2015 we began making investments, a lot of that was on the process side. 2016 was all about bringing in new talent, further strengthening the team, bringing in people that had actually had a strong track record of pursuing large contracts and winning those contracts.

We are continuing to build out that talent, but it has gotten much, much stronger throughout the year.

The other change is I'm pretty much a fanatic on pipeline management being extremely thorough in our opportunity to win, our probability to win, and putting together industry teams that can win and take away business. We've gotten much stronger in that regard over the past year.

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Brian Kinstlinger, Maxim Group - Analyst [27]

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Great. If I look at your revenue guidance, at the low point what percentage is coming out of backlog, recompetes, and then obviously remaining factor is that you need to go in and generate revenue from?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [28]

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Well, yes, that's a hard one to answer because there's three variables there. There's the base, there's recompetes, and then there's new business. So at the low end of the guidance, it depends which number changes and which number stays the same. So if we had a base degradation more than we planned, then that base number would be lower and we'd still have about 6% recompetes and new business.

Obviously, if you win less new business, you can get to the bottom end of the range by winning 3% or 4% new business and everything else being the same.

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Lynn Dugle, Engility Holdings, Inc. - CEO [29]

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And just maybe to say that a slightly different way. We've talked about 6% in 2017 being new business. At the low end of our range, that's about 4% new business, and at the high end it would be closer to 9%.

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Brian Kinstlinger, Maxim Group - Analyst [30]

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Got it. And then finally, can you just highlight -- you had mentioned you lost a few programs that's causing the dip in the first quarter. Can you highlight maybe how many programs and what the total annual revenue contribution was for last year?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [31]

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I'm sorry, ask that one again.

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Lynn Dugle, Engility Holdings, Inc. - CEO [32]

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We can't -- we're having a little bit of problem with the phone line, so if you could speak up just a little bit.

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Brian Kinstlinger, Maxim Group - Analyst [33]

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It could be mine, I'm sorry. I seem to have lots of phone problems. I'm trying to -- I think you had mentioned the first-quarter revenue outlook somewhat will be depressed because you've lost a few contracts. If you can discuss maybe how many, but more importantly, what the annual revenue contribution of those were.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [34]

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Of the few losses that we (multiple speakers) yes, yes --.

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Lynn Dugle, Engility Holdings, Inc. - CEO [35]

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It would be the annualized versus the quarter number.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [36]

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The ones we lost, if you're talking about the new ones that we mentioned that we didn't bring in in the last quarter --?

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Brian Kinstlinger, Maxim Group - Analyst [37]

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I thought you said that revenue was dipping in the first quarter for a couple reasons. The first is the divestiture, but then also I thought you said that there were some programs that you were the contractor on that you had lost, unless I was mistaken by your comment.

So I was wondering what the annual revenue contribution was for those.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [38]

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Yes, the comment I made was that there was -- that beyond the divestiture, there was also some slow ramp-ups on contracts we had won and some protests. So revenue that we would've thought we would have gotten in the first quarter is still under protest.

And the last point I made is there were a couple new contracts that I would tell you were in our projections in the fourth quarter that we didn't win. If you're talking about those, the one that I can think -- there's one big one I can think of that was probably worth, I want to say, $20 million a year. And then there's some smaller, a couple smaller ones.

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Brian Kinstlinger, Maxim Group - Analyst [39]

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Just to make sure we're talking about the same thing, were you guys actually a prime on that before, or is that one you were trying to take away that you didn't win?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [40]

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Those were takeaways. (multiple speakers).

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Lynn Dugle, Engility Holdings, Inc. - CEO [41]

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Yes, all takeaways.

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Brian Kinstlinger, Maxim Group - Analyst [42]

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You didn't lose any programs that you were the incumbent on.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [43]

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That's correct.

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Brian Kinstlinger, Maxim Group - Analyst [44]

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Okay, great. Thanks for the clarification.

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Operator [45]

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(Operator Instructions). Lucy Guo, Cowen and Company.

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Lucy Guo, Cowen and Company - Analyst [46]

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Good morning. A follow-up on the previous question on the sales guide. Maybe another way to ask is, Lynn, you had mentioned there could be some potential positives from President Trump's initiatives. Can you maybe give a little bit more detail there?

And I think the question on the recompetes is generally speaking, there's about 20%, 25% of business up for recompete. What are you assuming in 2017?

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Lynn Dugle, Engility Holdings, Inc. - CEO [47]

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So let me start with just -- I will briefly touch on the recompete number. We think in 2017, that will be about 15%, so a little bit lower than normal. We always caveat that, Lucy, as we've talked many times is, our history is things slide out, we get extensions. Especially with an administration change and the amount of employee turnover there, we could well see extensions on existing. But today that number sits at about 15%.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [48]

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Right, and then if I just add, there's a difference, Lucy, between saying how much is the revenue component this year and what revenue is up for recompete. It depends on the timing of that. So there's about 15% of our base up for recompete, but the timing of it is such that it's only a 6% -- it's only 6% of the revenue this year.

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Lynn Dugle, Engility Holdings, Inc. - CEO [49]

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Yes, yes.

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Lucy Guo, Cowen and Company - Analyst [50]

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Understand. Can you also address the potential tailwinds?

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Lynn Dugle, Engility Holdings, Inc. - CEO [51]

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So let me just do the, to your point, the headwinds and the tailwinds as we look at the new administration. Certainly, as we go through time, we get more clarity. There's been a lot of discussion from the defense side of the business what might the plus-ups be, in the range of $50 billion.

We've gotten some general direction on areas that President Trump would be interested in growing, and those fit nicely. Especially if I look across when we think about things like transportation, we are very strong in various DOT organizations. The one you'd be most familiar with would be FAA.

When we talk about readiness, we now have three ex-Marine generals on the Trump team, and readiness is very personal to them and we've long had a substantial training business, so might something pull through there. So we could go through that, but I'm just -- I'm just a few weeks short of finishing that year number one in Engility. And the commitment that I made to all my shareholders was that we would be prudent, we'd be conservative, and we would make the numbers that we gave you. And I just feel it's too early to make any kind of assumption on the upside.

As far as the downside of a new administration, we are quite fortunate in the areas that the administration has targeted for cuts, things like IRS, perhaps Department of Education --.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [52]

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Environment.

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Lynn Dugle, Engility Holdings, Inc. - CEO [53]

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Yes, the EPA. We took a run across all of those agencies, and less than 1% of our revenue are with those agencies. So we don't see much of a downside from an Engility perspective.

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Lucy Guo, Cowen and Company - Analyst [54]

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That's helpful. And just to clarify on the EBITDA margin or EBITDA guidance, are you assuming flattish year-over-year at around 9% on an adjusted basis? And maybe on that, are you assuming any changes in your business development expenses year-over-year?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [55]

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So on the EBITDA margin, yes, Lucy, if you look at it, you can look at the EBITDA or we gave you what the adjustments were. But our margins are basically flat year-over-year.

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Lynn Dugle, Engility Holdings, Inc. - CEO [56]

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And as far as business development, I think that I see no large changes in BD. What we are doing now, I'd say, is really fine tuning. And as I mentioned, a lot of that is really just getting the right people in the right jobs that have operated at a $2 billion company level in this new environment for Engility, in many ways, of best value and larger contracts.

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Lucy Guo, Cowen and Company - Analyst [57]

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Got it. One more clarification on free cash guide, or it's roughly $85 million at the midpoint if you subtract out CapEx. Is there any other items besides your planned 401(k) payments of $15 million?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [58]

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No. Lucy, we basically and as the time went on and now we closed -- I think the last time we talked to you, we hadn't closed our repricing yet. We've essentially wiped out any downside this year. We are kind of flat year-over-year, and we are actually -- our guidance was $95 million to $105 million, so slightly up from last year. Essentially the money we spent refinancing last year and the benefit of the 401(k) timing reversing this year, essentially were flat year-over-year.

We actually have a tailwind going into 2018 where we should pick up, just from a working capital perspective, another $15 million or so in 2018. So we've managed through the refinancing to offset what the impact was going to be for this year, and we are going to have a benefit in 2018.

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Lucy Guo, Cowen and Company - Analyst [59]

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So are you assuming flattish working capital this year in 2017?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [60]

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Yes, I think we might have a day improvement on our DSO, but reasonably flat for that working capital. There is a shift -- because of the 401(k) payment timing, there is a shift on our employee accrual which helped us last year and hurts us this year, but again it's overcome by the savings, the interest savings.

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Lucy Guo, Cowen and Company - Analyst [61]

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Right. And the $95 million to $105 million, that's operating cash, right? So CapEx of $20 million, is that in line with where you had thought previously as well?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [62]

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Yes, you are right on the $95 million to $105 million. What was your question on the $20 million?

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Lynn Dugle, Engility Holdings, Inc. - CEO [63]

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Capital expenses. You're right in the ballpark.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [64]

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Yes, yes.

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Lucy Guo, Cowen and Company - Analyst [65]

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Okay. But CapEx was on plan with what you had -- it's flat year-over-year as well, so you weren't putting out any lower CapEx.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [66]

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We -- the only thing I would say is we do have some customer desires to do some things that might require some CapEx from us above that, but if that's the case we're going to get reimbursed for it. So net-net that's a good thing, not a bad thing.

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Lucy Guo, Cowen and Company - Analyst [67]

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Got it. Very helpful, thank you.

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Operator [68]

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Brian Ruttenbur, Drexel Hamilton.

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Brian Ruttenbur, Drexel Hamilton - Analyst [69]

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Yes, thank you very much. A couple additional questions. In the past you have given adjusted EPS; you are talking only GAAP. Should we be looking at you only on a GAAP basis? Can you tell us what you are thinking on an adjusted EPS basis, because I think that's how we report it to the central agencies that look at that stuff on an adjusted EPS basis? So maybe address that first.

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [70]

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Brian, I think we've given you all the information to get there. We're not doing guidance on an adjusted GAAP EPS basis, but based on the information we've given you, making adjustments and adding back the amortization expense, and then also looking at the tax accrual, note that that's an accrual on our P&L but we're only going to pay $1 million in taxes. You adjust for that and you can get to the adjusted EPS.

We'd be glad to take you through the math on that because, again, all the material information is being disclosed.

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Brian Ruttenbur, Drexel Hamilton - Analyst [71]

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Okay, very good. So it looks like just numbers on the adjusted EPS will be, let's say, $1.60 to $1.80 ballpark-ish for 2017, which is flattish to slightly up from 2016. Is that the right ballpark?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [72]

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Yes, I think the ballpark is more in the $2 range.

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Brian Ruttenbur, Drexel Hamilton - Analyst [73]

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Okay. I'm maybe not backing in enough stuff. Okay, I will deal with that later. In terms of the delays from the Trump administration, let me just hit on that a little bit more, not to beat a dead horse, so to speak. But what are you hearing, Lynn, on delays, a CR? Is it going to get stretched throughout the year?

I'd just like to get your pulse on what you are hearing. We've heard from a lot of your competitors about what they think, and would just like to hear your perspective on timing of the macro.

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Lynn Dugle, Engility Holdings, Inc. - CEO [74]

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Yes. You know what, I would say my competitors maybe are more bold than I am. Certainly, we are looking at April coming up on a decision point. There's certainly a group of people that think it could go the whole year. The good news for us and perhaps why I haven't queried the people on the Hill as much as others is that we really have not seen any impact, any material impact for Engility on the CR.

The only thing it really paces for us is certainly we want to be spring-loaded if they clear the CR, so we can help our customers spend whatever money they have in the year, and are collecting and boarding those ideas with the customer in the case that the CR is cleared here in April.

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Brian Ruttenbur, Drexel Hamilton - Analyst [75]

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Great, thank you very much.

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Operator [76]

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(Operator Instructions). Tobey Sommer, SunTrust.

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Tobey Sommer, SunTrust Robinson Humphrey - Analyst [77]

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This is Tobey. I had a question about the follow-up on the protest. Is it pervasive among all kinds of competitors, or did you happen to take away business from a narrower set of competitors who then protested pretty uniformly?

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Lynn Dugle, Engility Holdings, Inc. - CEO [78]

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Yes, we don't publicly disclose any of the details on our protests, but I think really the crux of your question is, is it isolated to a competitor or a market; and the answer is no. We've seen protests across -- I'm trying to think through -- I believe we've seen protests in all three areas. So space and intel, we've seen them in fed-civ, we've seen them in DoD, and those would be from multiple different competitors.

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Tobey Sommer, SunTrust Robinson Humphrey - Analyst [79]

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Okay. I kind of wanted to step back and ask you what are the, as you see it, the tangible financial benefit of the improved employee engagement that you've described on prior calls and alluded to on this one as well? Thank you.

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Lynn Dugle, Engility Holdings, Inc. - CEO [80]

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Yes, and this is a really encouraging piece of data for me as a newer leader. Bottom line upfront, we are a people business, and every day we don't have people in our customers' mission areas, we're not making money. We are running lower than the average attrition rate for the industry. We have targeted a 15% attrition rate versus the industry average of 20%.

Every bit of progress we make there translates to more revenue for us. Our ability to attract the type of talent that we need is really, I think, predicated on the type of work that you offer people and how close you can get them to meaningful mission work.

And as we've transitioned out of LPTA and things that are primarily cost price driven, lower complexity, lower technology content, it's not as appealing for those high achievers. So we are seeing good progress there.

We had to make some changes in our benefit structure, in our compensation structure, to make sure that we could go out in the market and get the best people. We've done all of that and we've done it in a way that has kept our costs in line and keeps us competitive.

So I think the data that's most exciting to me is that as we came out of last year, over 30% in the last quarter of 2016 of our hires were people that were personally recommended and referred by our current employees. And that's what you want, people that are excited enough to be here that they'll go get a friend or family member to come join our team.

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Tobey Sommer, SunTrust Robinson Humphrey - Analyst [81]

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Okay, thank you for your perspective on that.

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Operator [82]

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Brian Kinstlinger, Maxim Group.

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Brian Kinstlinger, Maxim Group - Analyst [83]

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Just one more quick one. You mentioned $1 million in cash taxes expected for this year. Can you give the expected rate that is assumed in the GAAP numbers? And then also did you give a number that you expect to pay down -- pay for interest in 2017?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [84]

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So on the cash taxes, it's $1 million. That will continue 6 or 7 years. I think we had on the back pages, I think 37%, something in that neighborhood would be what we would show on our P&L.

And then our paydown -- we are doing $95 million to $105 million. Our paydown is going to be slightly more than that because we already paid down $20 million. So we think we are going to be around $110 million debt paydown this year.

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Lynn Dugle, Engility Holdings, Inc. - CEO [85]

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And you asked about the cash interest expense, and that's about $65 million, $67 million.

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Brian Kinstlinger, Maxim Group - Analyst [86]

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$65 million?

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Wayne Rehberger, Engility Holdings, Inc. - SVP and CFO [87]

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$65 million to $70 million, depending on what the Fed does with rates this year, I guess.

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Brian Kinstlinger, Maxim Group - Analyst [88]

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The $65 million to $70 million is the interest expense.

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Lynn Dugle, Engility Holdings, Inc. - CEO [89]

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Correct.

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Brian Kinstlinger, Maxim Group - Analyst [90]

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Great, thank you so much.

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Operator [91]

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Thank you. And this is all the time we have for questions and answers. I would now like to turn the call back over to Dave Spille for any further remarks.

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Dave Spille, Engility Holdings, Inc. - VP IR, Corporate Communications [92]

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Thank you for joining us today. We look forward to seeing many of you over the coming weeks, and with that we'll end today's call. Have a great day.

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Operator [93]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.