Business Context and Reporting Period
This Form 8-K, dated January 14, 2019, reports the completion of the merger between Science Applications International Corporation (SAIC) and Engility Holdings, Inc. (Engility). On this date, Engility became a wholly-owned subsidiary of SAIC. The filing also details the execution of a definitive material agreement regarding the joinder of Engility to SAIC's existing credit facility and the appointment of new directors to the SAIC Board.
Key Financial Metrics and Capital Structure
The filing does not provide specific revenue, profit, cash flow, or margin figures for the reporting period. However, it discloses significant changes to the company's capital structure and debt obligations:
- Term Loan A: SAIC borrowed the full commitment amount of $1,068,000,000 under a senior secured term loan facility.
- Use of Proceeds: Funds were used to repay Engility's existing credit facility and notes, pay merger fees and expenses, and retained for general corporate purposes.
- Revolving Credit Facility: The commitment was automatically increased by $200,000,000 upon the merger's effectiveness.
- Interest Rates: Variable rates based on LIBOR or base rate plus an applicable margin. Margins range from 1.25% to 2.00% for LIBOR loans and 0.25% to 1.00% for base rate loans, dependent on the Leverage Ratio.
- Maturity: The Term Loan A and revolving credit facility mature on October 31, 2023.
- Amortization: Quarterly amortization begins January 31, 2020, starting at 1.25% of the original amount, increasing to 1.875% in 2021 and 2.50% in 2022.
Material Changes Versus Prior Period
The primary material change is the acquisition of Engility, which alters the company's asset base, equity structure, and debt load.
- Equity Conversion: Each outstanding share of Engility common stock was converted into 0.450 shares of SAIC common stock (the Exchange Ratio). Fractional shares were paid in cash.
- Equity Awards: Engility restricted stock units (RSUs) and performance units (PUs) were automatically converted into SAIC RSUs based on the Exchange Ratio.
- Debt Obligations: SAIC assumed new debt obligations totaling $1.068 billion in term loans and expanded its revolving credit capacity by $200 million.
- Covenants: The company is now subject to a Senior Secured Leverage Ratio covenant of not greater than 4.50 to 1.00 for the next six fiscal quarters, decreasing to 4.00 to 1.00 thereafter.
Guidance, Outlook, and Governance Changes
The filing does not contain forward-looking financial guidance or management commentary regarding future earnings. It focuses on the structural completion of the merger and governance updates.
- Board Expansion: The SAIC Board of Directors was increased from nine to eleven members.
- New Appointments: David M. Kerko and Katharina G. McFarland were appointed as "Engility Designated Directors." Both are deemed independent.
- Committee Assignments: Mr. Kerko joined the Audit and Human Resources/Compensation Committees. Ms. McFarland joined the Classified Business Oversight and Ethics/Corporate Responsibility Committees.
- Risks and Contingencies: The Credit Agreement includes standard events of default, including bankruptcy, nonpayment, cross-defaults, and breach of covenants. Failure to meet leverage ratios or other covenants could result in the acceleration of debt.
Investor Verification Checklist
- Verify the exact number of SAIC shares issued to Engility shareholders based on the 0.450 Exchange Ratio to assess dilution impact.
- Review the full text of the Credit Agreement (Exhibit 10.1 to the September 10, 2018 8-K) to understand specific definitions of "Excess Cash Flow" and mandatory prepayment triggers.
- Confirm the pro forma financial statements filed in the Form S-4 (December 4, 2018) to understand the combined entity's projected leverage and liquidity.
- Monitor the company's ability to maintain the Senior Secured Leverage Ratio below 4.50 to 1.00 for the next six fiscal quarters.
- Check for any subsequent filings regarding the integration of Engility's operations and the realization of anticipated synergies.