Engility Holdings' (EGL) CEO Lynn Dugle on Q2 2016 Results - Earnings Call Transcript

| About: Engility Holdings (EGL)

Engility Holdings, Inc. (NYSE:EGL)

Q2 2016 Earnings Conference Call

August 01, 2016, 08:30 AM ET

Executives

Dave Spille - VP, IR and Corporate Communications

Lynn Dugle - CEO

Wayne Rehberger - SVP and CFO

John Hynes - EVP and COO

Analysts

Amit Singh - Jefferies

William Loomis - Stifel Nicolaus

Brian Kinstlinger - Maxim Group

Christopher Van Horn - FBR Capital Markets & Co.

Lucy Guo - Cowen and Company

Kwan Kim - SunTrust Robinson Humphrey

Mark Jordan - Noble Financial Group

Operator

Good day ladies and gentlemen, and welcome to the Engility Holdings' Q2 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Dave Spille, Vice President of Investor Relations. Please go ahead, sir.

Dave Spille

Thank you. Good morning and thank you for joining us today to discuss our second quarter 2016 financial results. Please note that we've provided presentation slides on the Investor Relations section of our website.

On the call with me today are Lynn Dugle, Chief Executive Officer; Wayne Rehberger, Senior Vice President and Chief Financial Officer; and John Hynes, President and Chief Operating Officer.

Today, Lynn will provide an overview of our operating results for the quarter, and then Wayne will discuss our second quarter financial results and our outlook for the remainder of 2016. 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 risk and uncertainty 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 factors are described in our 2015 Form 10-K. We do not undertake any obligation to update forward-looking statements.

Management will also make reference to non-GAAP financial measures during this call. 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.

Lynn Dugle

Thank you, Dave and good morning everyone. I'm very pleased to share our second quarter results and to update you on the progress we're making towards our strategic objective.

First, allow me to briefly touch upon our financial results for the second quarter and then put those results within the context of our strategic plan, discussing both our operational progress and our outlook.

We ended the second quarter with revenue, profitability, and cash flow meeting or slightly beating expectations. We made progress on improving our book-to-bill ratio, 1.2 for the quarter, and are increasing our guidance on EPS and narrowing our revenue and adjusted EBITDA guidance ranges.

These successes are the result of strategic decisions made earlier this year to invest more in business capture activities and create a more focused and structured approach to growth.

As you will recall, we established three strategic objectives for our company. First, to realize sustainable organic growth; second, attract, grow, and retain key talent; and third, to strengthen our balance sheet. We're pleased to report that we have made progress on each of these during Q2.

To accomplish our first strategic objective, returning the company to sustainable organic growth, we must continue to deliver exceptional program performance on our existing contracts, be selective in which programs we pursue closely matching our ability to deliver mission-critical service to our customers' needs, and continue to invest to win thereby enabling an increase in our win rate and total bookings and improve performance in the marketplace.

We continue to invest in our business development, capture, and proposal organizations. We are leveraging our enhanced scale, subject matter expertise, and broad set of technical capabilities to submit more effective proposals.

And finally, we are pursuing larger opportunities with a high degree of focus on the intel, space, and federal civilian markets as well as other areas where we have mission-critical and technical skills that differentiate us in the market, and these initiatives are beginning to pay-off.

During the second quarter, we won several key re-competes including a $248 million Defense Threat Reduction Agency contract and a Transportation Security Agency contract with a ceiling value of $90 million.

Since the end of the quarter, we have won multiple single award contracts or extensions with an expected value in excess of $500 million. Although some of these third quarter awards are subject to protests, we're pleased by the progress they represent as they demonstrate our ability to selectively target, pursue, and win larger contracts.

We also see these awards and other recent contracting activity as an indication that the government procurement process is starting to stabilize and in some areas the pace of procurement appears to be picking up. And while a steady flow of adjudications would be ideal, in our opinion, the timing of award activity will continue to be uneven for the foreseeable future.

Operationally, we continue to deliver exceptional program performance for our customers achieving high award fee scores and winning our re-compete contracts.

Regarding our second strategic objective of attracting, growing, and retaining talent, we continue to devise and implement a multifaceted training and development program to better equip our leaders to grow their business, engage their team, and enhance the overall employee experience.

We've recently launched an enhanced employee referral program that is gaining early traction. For the first six months of this year, approximately 25% of our new hires were referred by other Engility employees. We are a people-driven business and we believe these investments in our employees will provide future benefits to our company and shareholders.

Finally, our third strategic objective is to strengthen our balance sheet. As a result of the strong cash flow we continue to generate, we made voluntary debt prepayments of $20 million during the second quarter bringing our total voluntary debt prepayment to $30 million for the first six months of 2016. This is solid progress toward our goal of paying down our debt.

In addition, we also recently announced that we are in the process of refinancing all of our existing debt and expanding our revolving credit facility. We are examining the options available to us at this time and if market conditions cooperate, we expect to materially reduce our interest expense, increase our financial flexibility, and extend the weighted average maturity of our debt. Wayne will provide additional detail on our refinancing efforts in a few moments.

In summary, we had a solid first half of the year. Our book-to-bill ratio is improving, our pipeline is growing, and market conditions are stabilizing. Although we take a long-term view and know that success cannot be measured in just two quarters, we are making progress. We're working hard to meet our strategic objectives and look forward to updating you on the status of our refinancing efforts in the near future.

With that, I will turn the call over to Wayne to discuss our second quarter 2016 financial highlights.

Wayne Rehberger

Thank you, Lynn and good morning everyone. Our second quarter 2016 results were highlighted by revenue of $535 million, adjusted EBITDA of $48 million, adjusted EPS of $0.34 per share, cash flow of $23 million, and DSO of 55 days. All of these metrics met or exceeded expectations for the quarter.

In discussing the details of our second quarter results, I'll separate my remarks into five key areas; the income statement, cash flow statement, balance sheet, contract awards, and our guidance.

As I've done on previous earnings calls, we will discuss our financial results on an adjusted basis, which excludes $3 million of TASC, acquisition and integration costs, and $6 million of amortization expenses associated with our TASC and DRC acquisitions. Please note that we have provided a GAAP reconciliation in the press release we issued this morning.

Starting with the income statement, our second quarter revenue of $535 million was slightly ahead of expectations and included about $5 million in supplemental contract activity completed in the second quarter that may not reoccur in subsequent quarters. We achieved sequential growth second quarter over first quarter even if you adjust for the supplemental revenue I just mentioned.

On a year-over-year basis, our second quarter revenue declined by about 7%. Over 70% of this decrease was the result of three items; the completion of our Pakistan power contract in the fourth quarter of 2015; the sale of a Defense Threat Reduction Agency contract, that's a DoD customer, in the third quarter of 2015 due to a conflict of interest concerns; and three, the reduction in legacy L3 pass-through revenue that was inherited from L3 at spin. The remainder of the decline consisted of a number of smaller contracts that either ended or incurred scope reductions.

GAAP SG&A costs for the second quarter were $43 million, a $3.5 million sequential decrease from the March 2016 quarter. This decrease was driven by lower acquisition related amortization expenses and restructuring costs versus the first quarter.

Our second quarter adjusted operating margin was 8.2% and our adjusted EBITDA margin was 9%, both slightly higher than expected as a result of additional income from higher margin programs along with positive contract adjustments.

On a GAAP basis, we recorded a $2 million tax expense in the second quarter of 2016. This expense was driven by our second quarter pretax profit of approximately $6 million. Because of our significant tax attributes, we expect to pay approximately $1 million in cash taxes this year and for the next seven to eight years.

Our second quarter 2016 adjusted net income was $13 million or $0.34 per diluted share resulting from higher revenue and higher operating margins I discussed.

Now, let's turn to our cash flow and balance sheet metrics. Our DSO for the quarter was 55 days which is four days better than the March 2016 quarter and five days better than the June 2015 quarter.

This improvement reflects the positive effects of our integrated systems and improving execution. We continue to expect our DSOs to remain in the 55 to 60 days range over the long-term.

During the quarter, we generated $23 million in operating cash flow and made voluntary debt prepayments of $20 million. These payments reflect our commitment to continue paying down debt bringing our total prepayment amount for the first six months of 2016 to $30 million.

At the end of the quarter, our bank leverage ratio as defined by our current credit agreement was 4.8 times EBITDA which is significantly below our current covenant ratio of six times.

Now, let's turn to our forward-looking metrics including awards, book-to-bill, and backlog. We reported contract awards of $632 million, which is an increase of approximately 60% from the March 2016 quarter.

This equated to a book-to-bill ratio of 1.2 and brought our trailing 12-month book-to-bill to about 0.9 times revenue. We ended the second quarter of 2016 with a total backlog of approximately $3 billion, which is up from $2.9 billion last quarter.

Next, we'll discuss guidance. Based on our financial results for the first half of 2016 and our outlook for the remainder of the year, we're increasing the low end of our revenue and adjusted EBITDA ranges and we are increasing our 2016 GAAP diluted EPS and adjusted EPS guidance. Please note that these adjustments do not include any impact from our anticipated refinancing which I will discuss shortly.

For fiscal year 2016, we now expect revenue to be between $2.05 billion and $2.15 billion. The increase to the low end of this range is due to our second quarter results and increased visibility into our expected performance for the rest of the year. Our objective continues to be to grow revenue in the second half of this year over the first half of 2016.

Adjusted EBITDA will be between $182 million and $190 million. The increase to the low end of this range follows our change to the revenue guidance.

GAAP diluted EPS is expected to be between $0.08 and $0.23. The increase in this range is due to a $5 million decrease in our expected depreciation for 2016, partially offset by increased restructuring costs. We now expect depreciation and amortization expenses to be approximately $50 million for the year.

Adjusted diluted EPS is expected to be between $1.18 and $1.33. This metric benefits from the depreciation reduction of $5 million I just mentioned, but is not impacted by the increased restructuring expenses, which are added back to adjusted net income.

With regard to cash flow, guidance remains unchanged and we expect cash flow from operations to be between $105 million and $115 million.

Before I turn the call back over to Lynn for some additional thoughts, let me touch upon our plan to refinance our debt. Lynn has consistently communicated that one of our strategic objectives is to strengthen the balance sheet. As a result, one of our priorities was to get the company into a position to refinance our existing debt when the breakage fees on our second lien term loan were reduced by half at the end of May.

So, as market conditions have improved and our operating performance and outlook are solid, we announced last week our intent to refinance our first and second lien term loans. Included in that effort is to expand our revolving credit facility.

After successfully closing this transaction, we will reduce our interest expense, increase our financial flexibility and extend our debt maturities. We anticipate completing this transaction the week of August 8; however, successful completion is subject to market conditions.

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

Lynn Dugle

Thanks Wayne. To summarize, we're pleased with our second quarter results. Although it is still early, we're encouraged by the progress we are making against our three strategic objectives evidence of which is reflected in our improving book-to-bill ratio, our growing pipeline and stabilizing market conditions.

Going forward, we will continue to deliver exceptional mission-support to our customers and we will win more by continuing to invest in our business capture organizations leveraging our key strengths and remaining highly focused on select large opportunities, particularly in the intel, space and federal civilian markets. By concentrating our efforts in these areas, we will best position Engility over the long-term.

I look forward to updating you on our future progress and we'll now open up the line for questions. Operator can you please explain the Q&A process?

Question-and-Answer Session

Operator

Absolutely. [Operator Instructions]

And our first question comes from Amit Singh of Jefferies. Your line is now open.

Amit Singh

Hi, guys. Thank you for taking my question and great quarter. So, let me just start-off with you're expecting strong bookings in the third quarter as well and then bookings have been very strong the first two quarters. So, -- but looking at third quarter, should we expect the seasonal trend as in the third quarter bookings or book-to-bill to be better than what you saw in the first quarter and second quarter?

Lynn Dugle

Yes. We continue to see bookings to be somewhat lumpy and the bigger bids that you put in, of course, the bigger the swing from quarter-to-quarter. I would anticipate those in government would have some year-end spend increase.

Normally, on the service contracts, we don't see a big swinger there, but we could see a slight uptick as they put on end-of-year money.

Amit Singh

All right. Great. And then on refinancing, if you could give us a little bit of color on what is -- I mean I know a lot of it depends on the market conditions, but what type of interest rate reduction could you expect once you finance and if any quantitative information on how budget could benefit EPS on an annualized basis?

Wayne Rehberger

So, Amit I'll be glad to give you a little color. I mean we're looking to do a -- change our first lien loan out of a two tranche, one with a shorter duration, shorter tenor, one with a longer tenor. $200 million on a short tenor loan and we think that indicative pricing is kind of the 4.5% to 4.75%, and then a longer seven year term loan for $600 million -- thereabouts with pricing of 4.75% to 5%. We're also looking to replace the second lien loan with a bond and that offering would happen shortly.

In terms of how this is going to come out and -- how it's going to affect our EPS, we're going to kind of hold our powder here until we see that we get the -- we get this finished and we will be back out to talk to you very specifically about what the impacts of the final repricing will be on both our cash flow and EPS.

Amit Singh

All right. If I can just sneak in one more. I mean based on the strong bookings right now, should we expect -- when should we expect sort of the revenue growth to turn positive? I mean could it happen end of this year, early next year? And then next year, are you still expecting sort of low-to-mid single-digit organic revenue growth?

Lynn Dugle

Yes. Amit, we still look to have the second half grow relative to first half in 2016, which should position us well with a book-to-bill. We're still very much focused on a book-to-bill of over one for the year, so we can position for 2017 organic growth.

Amit Singh

All right. Great. Thank you.

Operator

Thank you. And our next question comes from Bill Loomis of Stifel. Your line is now open.

William Loomis

Hi. Thank you. Good morning. Just looking out, Wayne, did I hear you say on the awards so far this quarter were $500 million -- so $500 million just in July?

Lynn Dugle

Yes, Bill, this is Lynn, and we had a very good July. Now, those are large awards, they are takeaways. So there are incumbents there. We're not through the protest period, but we were encouraged by a pretty good start here on Q3.

William Loomis

Okay. So, they were business to Engility then?

Lynn Dugle

Pardon me?

Wayne Rehberger

Say again.

William Loomis

They were mostly new business to Engility?

Lynn Dugle

New business for us, but we were taking it away from one of our competitors.

William Loomis

And then, Wayne, just on financial visibility and managing the different operating units, can you just give us an update on how much more visibility you have on how the numbers are tracking through the month and the kind of control changes that you guys have made on your systems and how that's helped you on visibility versus a year ago?

Wayne Rehberger

Sure. From a year ago? I think considerable. I think -- first of all, I think the team in place now is just much more stable and mature, and so therefore, as you know when you have 1,800 contracts in TOs, you got to have visibility on most of those or most of the bigger ones and even the medium sized ones because they can impact your forecast.

So, first, I would say that our single system is a big thing. We have a single financial system. All of our contracts and TOs are loaded into that system in the same way, they have the same sort of controls around how we ensure that we can identify bookings, we can identify our period of performance and can identify the revenue and profit that goes along with those TOs and contracts.

Then secondly, again, I think the people now we have a solid group of finance people who are financially oriented who help us with those forecasts from a bottoms-up basis and the visibility there is a lot clearer.

We have gone through one strategic planning process; we're going to start another one in the coming weeks. It's much more disciplined. Lynn is driving to ensure that we're putting our investments in the right place and I think even the visibility going out a year or more has improved over the last year and I don't know if Lynn wants to add anything to that.

Lynn Dugle

No, Bill, other than to say I feel confident that we know where we're at, we're getting good information from our accounts. We're checking in regularly, we implemented a monthly operations review, so we can track that well and the systems absolutely are helping us.

William Loomis

Hey great. And then just on the rate ranges that you gave, Wayne, the preliminary ones. Was that on top of LIBOR -- when you say 4.50 to 4.75, is that basis points on top of something or is that their rate?

Wayne Rehberger

Yes, so, Bill, thank you. I can clarify there. The shorter tenor loan would be 4.50 to 4.75 with a zero floor. So, that would be on top of LIBOR and the second tranche would be with a 1% floor.

William Loomis

Okay. And that's like a three-month LIBOR?

Wayne Rehberger

Yes, I think it's a three-month LIBOR. First off I think right now it's running somewhere around 0.6 or something right around there.

William Loomis

Okay. And then just final one. GAAP tax rate, what is that going to be for the rest of the year?

Wayne Rehberger

I think about 27%.

William Loomis

Okay. Great. Thank you.

Operator

Thank you. And our next question comes from Brian Kinstlinger of Maxim Group. Your line is now open.

Brian Kinstlinger

Great. Thanks. Good morning.

Lynn Dugle

Good morning.

Brian Kinstlinger

The first question I had, it looks like your two largest awards in the second quarter were re-competes. Can you quantify the percentage of bookings that were from new business and maybe also in that number include the expansion on existing work?

Wayne Rehberger

So, the new business awards for the second quarter was about 10% new business. But again I'll point out that as we just talked about the third quarter, we've booked over $500 million of awards which is predominantly new business. So, --

Brian Kinstlinger

That was going to be my next one.

Wayne Rehberger

As Lynn said, especially takeaways, especially big takeaways, they are lumpy and they don't happen in every quarter.

Brian Kinstlinger

Can we delve into that $500 million of awards? It sounds like a bunch of its being protested. Maybe give us a number of contracts that are being protested and roughly the size of them or the total maybe?

Lynn Dugle

Yes, what we are saying there is that we are not through the protest period, so they could be protested. So, to be determined, but other than that, we've not said the customer nor the type of work until we get through that period.

Brian Kinstlinger

I see. So to be clear, nothing is being protested as of yet? Is that right?

Lynn Dugle

We have one contract that we've been notified that it is being protested.

Brian Kinstlinger

Can you give the size of that?

Lynn Dugle

We're really not going to give any information on that -- any more information on the 500 until we get through the protest or the protest period.

Brian Kinstlinger

Okay. And then we are heading into a potential sequestration, can you talk about the impact on the procurement process if at all as you guys see it?

Lynn Dugle

Yes, and we're still doing kind of a pursuit-by-pursuit analysis, but in general, we would be looking at operating under a CR, a continuing resolution which the impact would be new programs, brand new programs would not go forward. We think that probably the give and take on what would get extended versus new would pretty much balance out for us, but we're still taking a look.

At the sequestration level, as the budget passed, we're about flattish from the market. So, we wouldn't anticipate a large impact there and if we ended up somewhere closer to a presidential budget, you'd see kind of a flat to maybe a 1% growth going into next year.

Brian Kinstlinger

Great. And then we heard one of your competitors talk about losing some share to small businesses. Are you seeing increased requirements for small business as well and is that a potential headwind for the entire industry or do you see really no changes there?

Lynn Dugle

No. Well, I would say that we have headwinds from small business. I don't see it getting larger, but it's been a very large impact to the business for a number of years and that really is due to under the Obama administration as versus having small business participation goals.

We're actually seeing small business set asides, which is to say large companies cannot bid on that work. We're precluded or excluded from it so we need to partner up with small business. So, definitely has had an effect and will continue to have an effect.

Brian Kinstlinger

Great. And then the last question I have got is can you discuss the Forfeiture Support associates business that you guys own half of or a little bit more than half of? Is seems like there was an uptick in profitability for you guys there. So, maybe just talk about what is going on there and how you guys see that kind of going forward?

Lynn Dugle

Yes, I'd be happy to. So, the Forfeiture Services Support, I'm trying to get my acronym right and I'm not getting it, but basically it's a JV with AECOM. It's our largest program at Engility. We've got over 1,500 people that work it, they work at 400 different locations and what they are doing is working shoulder-to-shoulder doing forensic accounting, banking analysis, trying to find where funds have been misappropriated.

They work -- it's a Department of Justice program, but they work with any government agency that would claim assets. So, it might be DEA or Homeland Security or any number of other agencies. So, --

Brian Kinstlinger

So, we saw profitability really skyrocket there. Well, it's up 50% sequentially, so did something happen there to change the economics there or is there increased demand?

Wayne Rehberger

Actually I think the profitability if you look back, it fluctuates quarter-over-quarter. I think there was additional healthcare cost that were accrued in the first quarter and that is why it looks like profitability. Actually was probably low in the first quarter and we're kind of back to levels where we need to be.

Brian Kinstlinger

Great. Understood. Thank you so much.

Operator

Thank you. And our next question comes from Christopher Van Horn of FBR & Co. Your line is now open.

Christopher Van Horn

Good morning. Thanks for taking the calling and congrats on the quarter.

Lynn Dugle

Thank you.

Christopher Van Horn

Could you talk a little bit about -- I know you don't want to get into too much detail, but maybe just generally speaking including the $500 million, how is the customer mix kind of changed over the past maybe six months? And how do you expect that evolution to continue?

Lynn Dugle

We -- if I look at the customer mix, relatively stable. I talk a lot about how when TASC and Engility came together. We really evened out predominantly about 40% DoD, 30%, space, intel, 20% Fed Civ, just at the highest level.

Now, the intel business did have small growth, we're up 2% to 3% in this quarter as we are coming through which is consistent I think with the better focus on those three markets, bigger deals being very selective in what we go after.

Christopher Van Horn

Got it. And then I remember last quarter you talked about a couple of opportunities with the combination of $900 million. Have we seen those come through or are we still -- are you still bidding on those?

John Hynes

So, this is John Hynes. We've had three of the large ones go in at the end of the second quarter and beginning of the third quarter. So, we're tracking just as we had expected. Those things are all maintaining schedule.

Christopher Van Horn

Okay. Got it.

Wayne Rehberger

I would add, this is Wayne, I mean we're still tracking toward submitting around $5 billion in new business -- new business proposals this year and we're tracking pretty closely to that number by the end of the second quarter.

Christopher Van Horn

Got it. Just one last question too. I mean your award activity has been very significant and impressive frankly and could you point to maybe one or two things that you really think are standing out here that's getting these new business wins?

Lynn Dugle

It's really encouraging, Christopher, because I think it's a reflection of a strategy that we started when the companies came to together and it's working. We are being very hard on ourselves on where we have capabilities that really deliver mission for our customer.

We're starting early on those pursuits. I think we're making good decisions on teammates whether those be small businesses or big businesses. And so we see some traction, but we still have lots of work to do and more to get done as we move forward in the second half of the year.

Christopher Van Horn

Okay. Thanks again, and congrats.

Lynn Dugle

Thank you.

Operator

Thank you. And our next question comes from Lucy Guo of Cowen and Company. Your line is now open.

Lucy Guo

Good morning, Lynn, Wayne, John, and Dave. A follow-up on the last question regarding bids to be submitted. I believe you said in the past, John, that there were five to 10 bids that are over $200 million in size. So, you said that there are maybe three submitted already. Is that number still -- does that number still stand?

John Hynes

We're on track to deliver what we said we would do. So, those bids are all happening as projected. And so yes, we're on track.

Lucy Guo

And have you made any progress on the other large re-compete with the FAA Volpe Center?

John Hynes

So, yes, there's [Indiscernible] broke into two pieces, [Indiscernible] and we have submitted both of those.

Lucy Guo

When are those RFPs due or potentially forward?

John Hynes

Awards so -- as we said, they are lumpy so awards--.

Lynn Dugle

But the proposals are in, Lucy, so the RFPs have been pumped down, have been out. We wrote the proposals, they are submitted and now we're in that adjudication cycle. So always hard to guess how quickly the customer is going to move. But we've done all of our work.

Lucy Guo

Got it. And on the headcount side, are you through hiring key capture and bid and proposal people and where does headcount stand at the end of the quarter?

Lynn Dugle

As far as headcount, we're about 9,500, a little bit north of that we still and we'll always be taking opportunities to increase or capture staff, every team member. But we've got a good team and they're -- we're seeing some of those results.

Lucy Guo

Got it. And a couple of housekeeping items for Wayne. How much more voluntary debt pay-down is assumed in the second half?

And then secondly, are you expecting any one-time items in Q3 free cash flow? I believe Q2, you had some reversal of payables and employee costs and potentially be a payout to Tony, is that right.

Wayne Rehberger

So, there will be severance cost. Let me say, take that one at a time. First of all, I think that the employee compensation accruals have to do with timing more than anything else. Some ends of quarters you have one week or two weeks accrued and I think it changed quarter-over-quarter.

In terms of executive severance payouts, we think that's the second half of the year. So, that cash flow -- that cash has not been paid out for the most part. And then what was the first question?

Lucy Guo

Any voluntary debt pay-down plans for the second half?

Wayne Rehberger

Yes. So,--

Lucy Guo

I know that could change.

Wayne Rehberger

Yes, putting aside the refinancing, I think we talked about $60 million to --

John Hynes

$70 million to $80

Wayne Rehberger

$70 million to $80 million, so that would still be our guidance excluding -- obviously any refinancing is going to have refinancing costs associated with it and then we would have to reconfigure a pay-down schedule for the rest of the year.

Lucy Guo

That's very helpful. Thank you.

Operator

Thank you. [Operator Instructions]

And our next question comes from Tobey Sommer of SunTrust. Your line is now open.

Kwan Kim

Hi, this is actually Kwan Kim on for Toby. Thank you for taking my question. Could you talk about the pricing trend shifts you're seeing in a market regarding cost plus fixed price how many materials? And the customer activity maybe shifting away from LPTA contracts? Thank you.

Lynn Dugle

Yes, I'd be happy to. As far as the trends that we're seeing in the market starting with your question on LPTA, if we go back five years, that was certainly a trend. People -- customers across multiple markets were doing lowest price technically assessable contracting.

We've seen a shift back to a best value contracting mode in areas that really have more to do with services that are highly technical and very close to our customers' missions and what they are doing.

We see LPTA remaining in things that would have more to do with services that might be provisioning bases or some kind of maintenance contract. And so that is a good shift for us because we are definitely a mission critical technical skills type of company.

As far as costs plus versus T&M and fixed price, we've run stable at about 60% cost plus, 20% fixed price, 20% T&M. We do see that contracting type customer history if you will and so if we look at space and intel, they for decades have run more cost plus contracting versus a DoD that may have a different form or a federal civilian.

So, as we grow our various markets, we might see a bit of a shift consistent with the growth within that market but I don't see any big customer shifts going to new contracting types.

Kwan Kim

Thank you. That's helpful.

Wayne Rehberger

This is Wayne and just the last point about best value and LPTA, we looked at our last 50 bids and over 90% of the number of bids and 90% of the bid value that we had done over the last 50 has been best value, so less than 10% LPTA.

Kwan Kim

Got it. And could you remind us how 2017 will shape up as a re-compete year? Should we expect activity level to be on the normal, heavy or lighter side?

Lynn Dugle

Yes. Right. Our average is about 20% year-over-year and that is consistent when we operated as two separate companies and now as a combined company. I think that what would modulate that the most would be whether we go into a continuing resolution. So, that -- re-competes could be just pushed off, it would be hard to say, but my guess is we'd be between 15% in 20%.

Kwan Kim

Thank you. And my next question is about your long-term strategy for the company. Given the recent consolidation in the space, are you comfortable with the current size? What are the options being contemplated on the M&A front?

Lynn Dugle

Yes, and we certainly have a very supportive Board and if we wanted to look to make a niche acquisition, we could do it with our debt structure, a large $1 billion acquisition would not be where we are focused.

My full attention is on organic growth, getting the team organized, and positioned to be able to grow the business that we have, takeaway business from others, win our re-compete.

I feel very good, the way I measure what size I need to be, how big is optimal is basically do I have the capabilities and do I have a cost structure so I can price competitively up against companies of whatever size.

I worry sometimes more or just as much about small business as I do about very large businesses. Right now what the market is telling me is I've got lots of good capability, I can take to the market and certainly my cost structure allows me to win.

Kwan Kim

Thank you very much.

Operator

Thank you. And our next question comes from Mark Jordan of Noble Financial. Your line is now open.

Mark Jordan

Good morning. First question relative to what is your expectation for restructuring charges that will be booked in the third and fourth quarters?

Wayne Rehberger

I think we're talking about somewhere in the neighborhood of $5 million or $6 million, $5 million.

Mark Jordan

That's in aggregate?

Wayne Rehberger

Yes. So, I think we're talking total aggregate for the year to be around $5 million so that would leave a couple of million dollars for the third and fourth quarter. That number changes though.

If we cut some deals with some of our landlords, we're trying to get out of leases. So, I'm a little hesitant to jump on that number and say it's exact because it will depend on what opportunities we have to restructure some of these leases in 2016 versus 2017.

Mark Jordan

Okay. Another question related to the refinancing. What will be the total cost of refinancing the debt and what percent of that will flow through the P&L on GAAP earnings in the third quarter and what might be capitalized?

Wayne Rehberger

So, what we said was that we're going to hold off on trying to determine that while we're in the midst of really just going to market. We will come back to you and let you know the answer to those questions specifically after -- when and after the deal has been concluded.

Mark Jordan

Final question for me, is there any updating to the CapEx plans for this year?

Wayne Rehberger

No, there really isn't. In fact actually we said that we were going to have slightly less depreciation this year than we had anticipated and that's because some of the CapEx is being pushed to the right so to speak.

We had CapEx plans in some of the operating units that are just late in getting going and in terms of the spend, to reconfigure our facilities that also has been -- not delayed, but it's just not happening as quickly as we had planned for it to happened.

So, we're actually seeing a benefit to depreciation. I think by the end of the year, we'll be pretty close to our CapEx plan though.

Mark Jordan

And what is that number?

Wayne Rehberger

It's $15 million.

Mark Jordan

Okay. Thank you very much.

Operator

Thank you. And our next question comes from Brian Kinstlinger of Maxim Group. Your line is now open.

Brian Kinstlinger

Sorry, I tried to hit star 2. My follow-up was answered. Thanks.

Operator

Thank you. And that's all the time we have for questions today. I'd like to turn the conference back over to Lynn Dugle for closing remarks.

Lynn Dugle

Well, thank you for joining us today. We look forward to updating you on our refinancing progress here in the near future. Thanks for coming.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.

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