Engility reshaping for tighter times

March 24, 2013

Less than a year after its spin-off from L-3 Communications, Chantilly-based Engility has significantly cut its staff and costs in an effort to reposition itself as a low-cost services contractor.

The company’s reshaping reflects one way of trying to survive in a more cost-competitive market. As other companies, including McLean-based Science Applications International Corp., separate their government services businesses from their products lines, Engility’s moves are demonstrating one approach to a new environment.

When it was established, Engility planned a cost-cutting strategy that in some companies would take more than a year, said Anthony Smeraglinolo, Engility’s chief executive, in an interview. But the company has already completed the initiative, in an effort to reduce the uncertainty facing employees, he said.

Smeraglinolo reported that Engility has cut by 40 percent its so-called “indirect” employees, those who generally handle back-office tasks such as accounting, human resources, and payroll. In sum, the company has reduced about 4 percent of its 7,800-person workforce — or about 300 workers — through layoffs as well as voluntary and incentivized departures.

A spokesman said a large majority of the affected employees took incentives to leave.

The company’s model is to embrace a more price-conscious government approach. While other contractors have been bemoaning the government’s preference for “lowest price, technically acceptable” contracts, which allow it to select the cheapest proposal as long as it meets the requirements, Engility officials said they are welcoming it.

Engility is telling its customers “we created a company just for your mission,” Smeraglinolo said. “You’re not paying for research and development for things that don’t apply to your mission.”

Still, the company will likely have difficulties, particularly in adding work with solid profit margins, said William Loomis, managing director at the financial services firm Stifel Nicolaus, which has a business relationship with many government contractors, including Engility.

“You’re going to get the biggest benefit right after your initial cost cuts,” Loomis said. “The challenge is to try to ... keep the margins up while you’re actually growing the revenues in a very competitive environment.”

In the three-month period ended Dec. 31, profit reached $41.4 million ($2.38 per share), up from a loss of $57.6 million ($3.57) in the same period a year earlier. Still, revenue shrunk about 7 percent, totaling $395.7 million.

The company said the revenue decline was partly related to contracts ending in Afghanistan and Iraq.

And in comparing adjusted operating income for the year, a number that strips out one-time expenses, Engility’s profit actually declined to $129 million in 2012, down from about $178 million in 2011.

At the same time, Engility will have to fend off competitors who are also adjusting to this new model.

“Companies are focusing on recalibrating their businesses,” said Michael Smith of consulting firm the Silverline Group. “You can expect the competition to encroach on what Engility currently has as a competitive advantage.”

Still, investors are showing signs of confidence in the business. Since the company reported its earnings, its stock price, which had been hovering in the $18 to $19 a share range for months, has now been between $23 and $24 a share.

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