Business Context and Reporting Period
This Form 8-K, dated December 31, 2018, is a current report filed by Science Applications International Corporation (SAIC) to provide supplemental disclosures regarding its proposed merger with Engility. The filing amends the Proxy Statement/Prospectus filed on December 4, 2018, in response to litigation concerning the transaction. The report details additional information regarding non-disclosure agreements with potential third-party bidders and updates to financial analyses and forecasts used to evaluate the merger.
Key Financial Metrics and Forecasts
The filing does not report historical revenue, profit, or cash flow for SAIC or Engility for the period ended December 31, 2018. Instead, it provides unaudited forecasted financial information for Engility and valuation ranges derived from financial advisor analyses.
| Engility Forecast (in millions) | 2018 E | 2019 E | 2020 E | 2021 E | 2022 E |
|---|---|---|---|---|---|
| Revenue | $1,914 | $1,969 | $2,044 | $2,126 | $2,212 |
| Adjusted EBITDA | $174 | $177 | $183 | $192 | $199 |
| Adjusted Operating Income | $130 | $133 | $141 | $150 | $157 |
| Unlevered Free Cash Flow | $51 | $114 | $130 | $125 | $126 |
Valuation Ranges (Guggenheim Securities Analysis):
- Engility Stand-Alone Value: $26.45 - $48.36 per share (excluding tax benefits); $31.90 - $54.07 per share (including tax benefits).
- SAIC Stand-Alone Value: $66.00 - $100.44 per share.
- Implied Engility Value in Merger: $43.55 per share (excluding synergies) to $45.95 per share (including synergies), compared to a then-current price of $36.24.
Material Changes and Disclosures
The filing amends the Proxy Statement to clarify the timeline and terms of non-disclosure agreements (NDAs) between Engility and potential third-party acquirers ("Company A," "Company B," "Company C," and "Company D"). Key amendments include:
- Standstill Provisions: NDAs with SAIC (amended July 31, 2018), Company A (amended July 12, 2018), Company C (July 2, 2018), Company B (July 10, 2018), and Company D (July 25, 2018) all included "standstill" provisions. These provisions would terminate if Engility entered into a combination agreement with a third party resulting in a majority equity or asset acquisition.
- Financial Analysis Updates: The filing clarifies the perpetual growth rates (2.00% - 3.00%) and implied terminal year EBITDA multiples used in Discounted Cash Flow analyses for both Engility (8.7x - 12.1x) and SAIC (9.3x - 13.8x).
- Forecast Adjustments: Engility management adjusted SAIC's unaudited forecasts based on re-compete win rates, new business win rates, margin profiles, and actual performance variances in the first half of FY2019.
Guidance, Risks, and Contingencies
Management Commentary and Outlook: The filing emphasizes that the transaction is expected to create value, with the implied Engility equity value in the merger exceeding its then-current trading price. However, the company explicitly disclaims any duty to update forward-looking statements.
Risks and Contingencies: The filing lists extensive risks that could prevent the transaction from closing or realizing anticipated benefits, including:
- Failure to obtain stockholder approval or satisfy closing conditions.
- Integration challenges and failure to realize synergies or cost savings.
- Diversion of management attention and operational disruptions.
- U.S. government budget reductions, sequestration, or procurement delays.
- Competitor protests, loss of contracts, or changes in procurement rules.
- Cybersecurity threats and data security failures.
- Legal disputes and regulatory compliance issues.
Legal Status: The defendants (SAIC and Engility) deny that any further supplemental disclosure was legally required and state that nothing in the filing constitutes an admission of wrongdoing or violation of law.
Investor Verification Checklist
- Merger Approval Status: Verify if the transaction has received the necessary stockholder approvals from both SAIC and Engility.
- Third-Party Bids: Confirm whether any of the companies referenced (Company A, B, C, or D) submitted a formal competing offer or if the standstill provisions were triggered.
- Forecast Accuracy: Compare the unaudited Engility forecasts provided in this filing against actual financial results once the fiscal year closes.
- Regulatory Conditions: Monitor for any regulatory approvals or conditions precedent required for the merger to close.
- Legal Proceedings: Track the status of the litigation referenced in the filing to determine if it impacts the transaction timeline or terms.