Engility Holdings' (EGL) CEO Lynn Dugle on Q4 2017 Results - Earnings Call Transcript

Engility Holdings Inc. (NYSE:EGL) Q4 2017 Earnings Conference Call March 1, 2018 5:00 PM ET

Executives

Dave Spille – Vice President of Investor Relations

Lynn Dugle – Chairman, President and Chief Executive Officer

Wayne Rehberger – Senior Vice President and Chief Financial Officer

Analysts

Tobey Sommer – SunTrust

Edward Caso – Wells Fargo

Lucy Guo – Cowen & Company

Krishna Sinha – Vertical Research

Brian Kinstlinger – Maxim Group

Brian Ruttenbur – Drexel Hamilton

Christian Herbosa – Noble Capital Markets

Dan Drawbaugh – B. Riley FBR

Operator

Good day, ladies and gentlemen, and welcome to the Engility Holdings Fourth Quarter 2017 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, this conference call is being recorded.

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

Dave Spille

Thank you. Good afternoon, and thank you for joining us today to discuss our fourth quarter and full year 2017 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Lynn Dugle, Chairman, President and CEO; and Wayne Rehberger, Senior Vice President and CFO. Today, Lynn will provide an overview of our operating results and then Wayne will discuss our fourth quarter financial results and our outlook for 2018. 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 risk factors are described in our 2017 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. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures.

And now I’ll turn the call over to Lynn.

Lynn Dugle

Thanks, Dave, and good afternoon, everyone. Thank you for joining us to discuss our Q4 and full year results. During 2017, we made progress against our three key strategic objectives, positioning organic growth, attracting and retaining key talent; and strengthening our balance sheet. Significant accomplishments included the continued year-over-year growth of both our Space and Intel businesses, the rollout of our differentiated capabilities, including Cloud ASCEND and our mission-focused artificial intelligence solution, Synthetic Analyst, and the strengthening and refocusing of our defense business under new leadership.

We also bought incremental debt to our Board of Directors with the addition of John Barter, formally of AlliedSignal and Honeywell; and Katherine McFarlane, former army acquisition executive and Assistant Secretary of Defense for acquisition. We repriced our term loans twice, generating additional interest expense savings, and over the course of the year, made $110 million in debt repayment. We also achieved significant wins throughout the year, consistent with our desire to pursue larger deals and expand into new markets, examples included a $170 million contract with NASA to support and secure missions, including future moon and Mars expeditions; over $70 million worth of cybersecurity related work to save critical defense systems, a $190 million contract with the U.S. Army’s logistic modernization program, and approximately $160 million in specialized consulting and advanced research for the DoD.

The actions taken to improve our business have now led to six consecutive quarters with a book-to-bill ratio of 1.1 or above on a trailing 12-month basis. We were also within our 2017 guidance ranges on all metrics, excluding onetime non-cash charges and delivered strong results on profitability and cash flow. While we anticipated that our Q4 and Q1 2018 book-to-bill ratios would be lower, we were disappointed by our 0.4 book-to-bill for the quarter. As we look forward, our top priority is reversing the decline in top line revenue. At the midpoint of our guidance, we expect to end 2018 with a modest year-over-year decline, but on a solid path to organic growth in 2019.

Now, allow me to turn from an inside look to an outside look and discuss the current state of our market. We expect the final 2018 Spending Bill will be passed in March, with a substantial increase, up to $80 billion, for the Department of Defense. Although, we still have to see exactly how that $80 billion in increased spending is going to be allocated and we are readiness dollars will be spent, we remain confident that Engility will benefit as dollars flow to the services sector. We continue to monitor the budget and government priorities to make sure we are well-positioned and can shape opportunities as they mature.

Of significant interest to us, will be dollars flowing to space rated agency, where our expertise involve national and military systems, positions us well as the nation increases its investment in space as the next battlefield. We also remain focused on our growth initiatives, which are centered around four key activity. First, continued expansion and select new markets. Over the last 24 months, we identified targeted new customers that are already experiencing growth, including NASA, the Missile Defense Agency and the NSA, which are also driving the expansion of our 2018 pipeline.

In addition, we are building upon our recent wins with the U.S. Air Force Medical Service and exploring other healthcare informatics opportunities. Second, we are maximizing our substantial IDIQ portfolio. As shown by our Q4 wins, we continue to be awarded positions on important GWAC and IDIQ vehicles. We see this as a promising growth area, as we expand this team to pursue even more opportunities. Over the past 12 months, we’ve increased our multi-award IDIQ task order bids by 25% and we are on a path to double that in 2018.

Third, we are developing and delivering tool-enabled solutions. I previously mentioned Cloud ASCEND and Synthetic Analyst as new Engility solutions, and at GON in April, we will launch Mediceft. Mediceft is a versatile contact analytics and integration platform that can operate with virtually any data center system, which empowers our agencies to rapidly turn big data into better mission decision. We remain focused on strategically expanding our mission centric capability, including cyber and artificial intelligence application.

And finally, I will close by sharing a story about a newer program that demonstrates the progress we are making to grow revenue on existing contracts through solid operational performance. A little over a year ago, we took away a prime Intel analysis contract. Historically, the program had run with 200 employees, but we’ve been able to expand this work to 300 positions with the opportunity to grow to 500 as the customer adds new requirements. This emphasis on expanding current programs has been a major initiative for us in 2017, and is beginning to bear fruit.

Going forward, we will continue to protect our base, grow existing contracts and aggressively build targeted capabilities to open up additional markets. The progress we’ve seen on our internal initiatives coupled with a positive customer environment gives us confidence that we have the right strategy and team in place to execute our opportunities in 2018 and grow in 2019.

I will now turn the call over to Wayne.

Wayne Rehberger

Thank you, Lynn, and good afternoon, everyone. Before I review our financial results, I did want to acknowledge today’s announcement on Lynn’s unanimous election as board – as Chairman of our Board of Directors. Lynn has been an asset to Engility and this appointment reflects the confidence of our board and her strategic vision and leadership. Lynn has enhanced our performance, our operational tempo, discipline and culture. Congrats, Lynn, on your well-deserved appointment.

Now in discussing the details of our fourth quarter results, I will organize my remarks in the five key areas: the income statements; cash flow results; balance sheet improvement; contract awards; and guidance. As a reminder, we discuss certain financial results on an adjusted basis, when we believe they provide a meaningful comparison to our prior or future financial results. GAAP reconciliation tables are provided in the press release and the PowerPoint presentation we issued this afternoon. As you can see from today’s press release, we are reporting revenue, cash flow and profitability results within our fiscal year 2017 guidance ranges, excluding one-time non-cash charges.

Our fourth quarter was highlighted by strong profitability and cash flow results, and continued debt reduction. We reported fourth quarter revenue of $465 million, a 5% decrease from the third quarter of 2017. This decline was driven by fewer productive days in the fourth quarter, the ongoing impact from contracts, designated a small business set-aside, positive contract adjustment in the third quarter, which did not repeat in the fourth quarter.

On a year-over-year basis, our fourth quarter revenue declined by approximately 5%. When excluding the $16 million of IRG revenue from the fourth quarter of 2016, as this business was divested in January of 2017.

GAAP SG&A costs for the fourth quarter were $35 million, a 2% decrease from the third quarter of 2017. This increase was driven by $3 million in legal and settlement costs. Excluding these one-time items, operational SG&A costs decreased by approximately $1 million from last quarter.

Fourth quarter EBITDA was $34 million, which includes a $7 million non-cash goodwill charge related to revaluing our remaining international business and $3 million in legal and settlement cost I just mentioned. Excluding these items, our adjusted EBITDA of $44 million for the quarter exceeded our expectations and was the result of solid program execution, positive contract adjustments and continued cost discipline.

On a GAAP basis, our fourth quarter diluted EPS was negative $1.62. This includes $2.16 of expenses related to tax reform and other non-core operating costs, which are outlined in the adjusted operating income table and footnotes in today’s press release. The vast majority of this impact is a result of the reevaluation of the company’s deferred tax assets, in light of the 2017 Tax Act.

The value of the asset was reduced from approximately $211 million to $151 million. This has no impact to our current foreseeable future tax-advantaged position, as we expect to pay less than $1 million in annual cash taxes through 2025. During the fourth quarter of 2017, we paid $53,000 in cash taxes and for the full year, our cash taxes comprised of state and foreign taxes, totaled approximately $600,000.

Now I’ll turn to cash flow and balance sheet metrics. Our DSO for the quarter was 58 days, which was inline with last quarter. For 2018, we expect DSOs to continue to be within our 55 to 60-day guidance range. During the fourth quarter, we generated $90 million in operating cash flow, which was inline with our expectations. Our solid cash flow performance, coupled with over long-term tax attributes, enabled us to make debt payments of $24 million in the fourth quarter 2017.

As a result, we achieved our target of $110 million in total debt payments for the full year. Also, earlier in 2017, an anticipation of rising interest rates, we entered into a hedge on our floating-rate term loans through 2020. As a result, an average of 65% of our total debt is at fixed rates through that time period, limiting the negative impact of future LIBOR rate increases. Based on the current one-month LIBOR curve, we expect the weighted average interest rate for all of our outstanding debt to be approximately 6.4% in 2018.

Now let’s review a few key performance indicators associated with contract awards. During the fourth quarter, we reported contract awards of $179 million. This represents a quarterly book-to-bill ratio of 0.4, which was lower than expected due to the loss of a large contract bid and over $500 million of new business opportunities that are now expected to be adjudicated in 2018. However, we still achieved a trailing 12-month book-to-bill ratio of 1.

We ended the year with a total backlog of $3.4 billion, which is consistent with the December 2016 ending backlog, after adjusting for the sale of IRG. In addition, we ended the fourth quarter of 2017 with $3 billion in submitted bids, waiting adjudication.

Now let’s turn to the 2018 guidance. For fiscal year 2018, we expect revenue to be between $1.83 billion and $1.91 billion. Our revenue guidance range assumes that 88% of our revenue will be generated from existing contracts, 8% will come from recompetes, and 4% from new business at the midpoint in the guidance range.

Our EBITDA is expected to be between $160 million and $170 million, with EBITDA margins of approximately 8.8%. The year-over-year decline in our EBITDA margin is being driven by a more than 20% increase in growth and employee-related investments. More specifically, we are investing in exports, technologies and capabilities to serve our customers, while increasing Engility’s presence in an adjacent growth markets. We also continue to enhance certain employee incentive and fringe benefits related to growth efforts.

Lastly, we continue to be impacted, to some extent, by the movement of higher-margin fixed-price contracts to cost-plus contracts, which typically have lower margins. Our full year 2018 GAAP effective tax rate is expected to be approximately 25%, and as mentioned earlier, we expect this to pay less than $1 million in annual cash taxes through 2025.

GAAP diluted EPS is expected to be between $0.81 and $0.91 per diluted share. This range includes approximately $25 million in non-cash acquisition-related amortization expenses. Cash flow from operations expected to be between $100 million and $110 million, and we expect to make debt payments of approximately $100 million this year.

We got off to a good start against this objective and made a voluntary payment of $10 million at the end of February. In addition, we will continue to monitor the capital markets to ensure we capitalize on any opportunities that exist, to reprice our debt once again. As a starting point for our revenue and GAAP EPS in 2018, we expect first quarter revenue to be approximately $465 million and GAAP EPS to be approximately $0.18 to $0.20 per diluted share.

Revenue for the remaining three quarters should be relatively stable and we expect EPS in the low $0.20 range throughout the rest of the year. The other key assumptions comprising our 2018 guidance are outlined on Slide 7 in today’s PowerPoint presentation.

With that, I will open the call up for questions. Operator, can you give instructions for the Q&A process please.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Tobey Sommer with SunTrust.

Tobey Sommer

Thanks. I was wondering if you could – one thing you mentioned in your prepared remarks, I wanted to get a handle on, you mentioned multi-award IDIQs up 25%, could you elaborate on what you mean by that? Is it the total value or the number of vehicles?

Lynn Dugle

Yes. what I was referring to is the GWAC/IDIQ cell that we set up a little bit over a year ago and we’ve actually seen the number of bids submitted in one increased by 25%. The revenue was following the medical coding work that I referenced, which is our first kind of foray into medical informatics, with I’ll came through our GWAC cell, so that’s $65 million.

Tobey Sommer

Okay. And then I was wondering if you could give some color on the recompete loss and that you described and maybe that impacted the book-to-bill? And how does the composition of this year’s guidance relative to kind of a percentage of new and recompete work compared to your historical methodology and percentages from those two areas?

Lynn Dugle

Yes, sure. We didn’t have a recomplete in Q4. What we were referring were we went after a number of very long standing encumbrance on the Intel side, over last year, we had basically three of those. We won PWW, we lost one of those and we have one outstanding. So that was what I referred to. In addition, we had a number of our larger bids that ended up flowing into 2018 and some even into the second quarter, just based on our customers’ ability to get them adjudicated. If I look at kind of the makeup and Tobey, if I don’t cover everything, you asked in that question, please come back to me.

In 2017, our revenue with broken down, about 94% of it was based, 4% was recompete, and 2% was new business. When we set a plan for 2018 and we would normally be locking in early November, we thought our recompete would be about 15%. Since that time with somethings sliding right, it looks like and then us receiving extensions then to the contract that we have. Right now we are sitting at about 88% of 2018 revenue and base 8% on recompetes and 4% on new, and it’s early in the year. We’ve got some major recompetes that we were anticipating this year that we’ve already seen sliding more towards the end of the year. So my anticipation is that number would continue down throughout the year.

Tobey Sommer

Okay. One more question for me, I’ll get back in the queue. With respect to the budget agreements that was announced and the expected appropriation that will follow, does your guidance assume much of any impact from the increased funding? And then potentially contracting activity? Or is the kind of your scenario that if that’s more potentially of an impact on 2019? Thanks.

Lynn Dugle

In our thinking, it’s a 2019 impact. As we expect, they approved toward the end of March budget, we will actually be half way through the government fiscal year. And so they will just pass about six months to try to figure out what – where they replace those dollars and of course, we are spending a lot of energy, helping our customers get ready to do that as quickly as we can. Really what we know at this point on the 2018 budget, so we what’s between base and the overseas contingencies, we’ve got the appropriation title, right? So we can track dollars to what’s going into R&D, O&M, procurement and so forth.

And we know what each service is getting. We know that it looks like between Army and Marines, we’ll probably be at $45,000 to $50,000 troops, but we really don’t yet have the fidelity around what – where exactly we will fall in from the service based on readiness. There’s been hints that there will be additional funding for logistics, maintenance, training, all of those would bode well for us. But we really lack the next level of detail.

Operator

Thank you. And our next question comes from the line of Edward Caso with Wells Fargo.

Edward Caso

Hi, good evening. I was curious, most of your peers are talking about using some of their tax reform dollars to step up new business investments and if I’m doing my math right, you really don’t sort of benefit from that relatively. Has that put you at a disadvantage? And is that sort of why maybe EBITDA margins are a little lower than we thought it would be?

Lynn Dugle

Well, as usual, Ed, you’re right on. So far us, the new tax code is a non-event, because we do not pay federal taxes. As we analyze the – where we’re projecting our margins will be, that includes about $13 million of increase in spends and $10 million of that is all-around increased growth activities. And I don’t mean, just business development resources, we really are looking at how do we take commercial tools up, kind of package that with our proprietary methodology and bring that to the market as a way to drive us out of commodity services. So those investments are included. And then last year, I had shared that we had completely redefined our compensation and incentive programs to drive the growth that we were anticipating and we are making investments there as well.

Edward Caso

Do you see any of your clients yet being a little bit more aggressive on price here? Again, trying to use that tax thing? Or are they so far being behaved?

Lynn Dugle

I haven’t got any indication of that at the service level. I wouldn’t be at all surprised, if the Lockheed, Northrops and Raytheons aren’t getting asked those kinds of questions. One, because they run at much higher margins, and we’ll have kind of a windfall break here.

Edward Caso

Great. Thank you.

Lynn Dugle

Thanks, Ed.

Operator

Thank you. And our next question comes from the line of Lucy Guo from Cowen & Company.

Lucy Guo

Hi everyone, thanks for taking my questions. First to start off, can you update us on your thinking of cash deployment, sort of follow-up on the other question in terms of investments? Your CapEx is going up slightly, debt paydown is down a little bit. Can you just talk about what if anything has changed?

Wayne Rehberger

Sure, Lucy. So just really remember, we did have a bit of a windfall last year, last early in January, we sold off the IRG business and that gave us a little bit over $20 million. So, in fact, if you adjust for that, we are actually paying down more debt this year out of operations than we did last year. Having said that, that is the cash deployment strategy. It’s not changed. We certainly believe we have room to do a small acquisitions, if we find the right company that delivers either a capability or technology that we want. But if we don’t, we’ll continue to pay down debt aggressively over this year.

Lucy Guo

And that sounds like that would be bolt-on acquisitions. Have you communicated anything in terms of size or type of customer that you may be going after? You mentioned, healthcare is a new initiative.

Lynn Dugle

Yes, Lucy, what we’ve said, I think, in the past is $100 million to $150 million acquisition, where we could go on a cash deal, anything bigger than that would have to involve some level of equity. It would be very consistent with either a new geographic expansion, areas where we’d like to get in in a bigger footprint, versus growing that organically, or new customers. And the ones that we flagged out in the past is, our expanded footprint in Augusta and what we are doing there and perhaps looking at and there is obviously multiple agencies out of Huntsville, where we have NASA customers, MDA, et cetera.

It could also be more on the capability base side. Our play in cyber really comes a little bit differently than a lot of the peers, we kind of coming at [indiscernible] With our experience in IV&V testing on very, very complex grand systems and the like, and certification and network security profiles. That might be an area that as we try to accelerate, something along that capability to accelerate efforts there.

Lucy Guo

That’s helpful. Last question is on, if you can address your kind of revenue outlook by markets, between the legacy DoD work, Federal Civilian and then Intel and Space.

Lynn Dugle

Yes. And really the Engility business, over the last couple of years has really been this balance where we have our Space and Intel groups that have grown 3% or 4% over the last couple of years. But that being offset by the shrinkage that we saw in our Federal Civilian work and the legacy DoD work. And the reduction in Fed Civ, we’ve talked quite a lot about transitions to small businesses, especially out of the VA and what that has meant to us and on DoD. We had to make some very hard choices around what work we would continue to pursue, which goes along the lines of getting ourselves away from that lower-end service that had been part of an Engility’s history and moving our way up the kind of the value chain of services, if you will, dealing with more complex technical solutions, where we can bring something more to the game than just trying to drive cost down.

Lucy Guo

So just to be clear, you are still expecting Fed Civ to be down this year in 2018?

Lynn Dugle

I’m sorry, defense?

Wayne Rehberger

Fed Civ.

Lucy Guo

Federal Civilian.

Lynn Dugle

Federal Civ, probably flat to slightly down.

Lucy Guo

Got it. Thank you very much.

Operator

Our next question comes from the line of Krishna Sinha with Vertical Research.

Krishna Sinha

Hi, thanks, guys. So you mentioned in your remarks that you had $500 million of slippage of awards into 2018 and that hurt your book-to-bill in the quarter, we’ve heard a lot of like mixed commentary on the awards environment. Can you just kind of quantify, I guess you did quantify $500 million, but how much of that do you think is just going to be ongoing where the customer continues to push awards out, because you are not the only contractor that we’ve heard this from.

Lynn Dugle

I mean, it’s a good question and we just continue to see a drag on the acquisition core, whether it be in the Intel, Space or DoD. The timelines continue to expand. Yesterday I was speaking to a former Deputy Director, who told me that now service contracting out of his former agency is 18 months after submittal. It is that quite long. With the government shutdowns, logically if I will, that was just a few hours shutdown or very minor, but it is – it just slows everything down, because we are doing preplanning with customers on the shutdown and then recovery and working funding levels. It all just drags our cycle times slower.

Krishna Sinha

Okay, and then on margins, you mentioned that you guys were impacted by a shift of contracts from fixed-price cost plus. How much of that is attributable to your – you got it to 7% margins through 2017 and you came in at like 6.6%. So how much of that 40 bps of miss against the guidance was due to that shift? And how much do you think is – that’s going to impact you going forward?

Lynn Dugle

Let me and I’ll let Wayne do the math here quickly. But I mean, just in general, when we look at the growth and in our Space and Intel, that’s predominantly cost-plus business. So we anticipated that shift, because we knew those businesses were growing. We also had a shift in one of our major Intel programs that went from what we inherently of fixed-price to cost-plus contracting. So Wayne, I don’t know if you can put more color on the 40 bps…

Wayne Rehberger

Yes, what I’d like to do is from kind of an EBITDA perspective, take the I think – I don’t know if you taken the goodwill impairment and adjusted that out, but we think that the impact is somewhere in the $3 million to $4 million range next year, in terms of our actual margin loss. We’ve had, as Lynn said, there’s been significant movement. And unfortunately, it was movement where we had fairly high margins on the fixed-price work. So that’s what we think it is across the portfolio. And you can see, we’ve gone from 60% to 65% cost-plus last year.

Krishna Sinha

Okay. And then just maybe one more, obviously, you – last quarter, you mentioned that there would be some revenue headwinds coming into this year and obviously, that’s coming out – coming to bear. But I’m just curious, if there are any – is there any situation where there are contracts out there that you could win that would shift your revenue trajectory earlier than expected, meaning may be later this year, you could rid slight back to organic growth as opposed to sometime in 2019?

Lynn Dugle

If some of this is a math exercise, with only 4% in the new business, we win a little bit more than that number could grow. And maybe as counterintuitive as it is for 2018, the business that has the most potential to do that is actually our defense team, because they tend to be able to take better advantage of the GWAC and IDIQ. They have a generally short – shorter cycle, both on the proposal timeframe and the adjudication timeframe. So all of those would be variables and with kind of our normal win/loss, upside/downside.

Krishna Sinha

Thank you, guys.

Operator

Thank you. Our next question comes from the line of Brian Kinstlinger with Maxim Group.

Brian Kinstlinger

Hi, good evening, thanks. Want to start with the easy one, if you can talk about the awards from new business from $179 million?

Wayne Rehberger

I’m sorry.

Lynn Dugle

On the Q4?

Brian Kinstlinger

Yes. What percentage of those bookings were for the new business or expansion?

Wayne Rehberger

There was a small amount for new business. It was less than 5%. Most of it was recompete revenue?

Brian Kinstlinger

Got it, great. And then you mentioned you were disappointed in 4Q bookings and it sounded like that thus far in the first quarter, you were clear that $500 million was from the delays in adjudications, but maybe you can quantify the bids loss that were submitted and, typically I wouldn’t ask that, but what surprised me was the proposal outstanding went from – I thought if I heard you right, to the $3 billion from $4.4 billion, so it did go down substantially, even though there is delays, which I don’t think those delays get pulled out there. So maybe you could address that.

Lynn Dugle

Yes, I mean, so we – in fact I just haven’t to be looking at how much we had submitted. I mean yesterday we submitted more. So now we are at $3.2 billion. So I mean, that kind of moved around on us. The way I’m looking at it, Brian, from – maybe a higher level is an 2016, right, we submitted about $6 billion of work. In 2017, that number went to $5 million and if I look into 2018, it’s north of $7 billion again. And some of that is just kind of a lifecycle of the programs that we are going through. And so that’s kind of how I am tracking it.

Brian Kinstlinger

Yes. And so that’s the right thing, right. I think you guys have a bit of more work, but slight – what confuses me is how backlog went down – I know backlog proposal is outstanding went down at $1.4 billion, which seems like except in all these numbers.

Lynn Dugle

Well, remember that $900 million of that was MSOC.

Wayne Rehberger

Yes. MSOC had been protested and then they withdrew – the agency withdrew the award and so that was being reevaluated at that point in time, it was in the number.

Brian Kinstlinger

I see. So that’s the explanation.

Wayne Rehberger

Yes.

Brian Kinstlinger

Okay. And then of that $7 billion, could you talk about how much is for new business versus total value of recompete?

Lynn Dugle

Yes. It’s $4.7 billion on the news, about 65%.

Brian Kinstlinger

Great. And then – I think that’s it, because you preempted with an answer of my other question. Thank you so much.

Lynn Dugle

All right and thank you.

Brian Kinstlinger

Bye-bye.

Operator

[Operator Instructions] Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton.

Brian Ruttenbur

Yes, thank you very much. A couple of questions, if I could ask about the lock-up endings with Birch Partners, for the timing of that, I think that’s roughly 19 million shares. Wayne, you might have a more accurate number than me.

Lynn Dugle

No. That’s right.

Brian Ruttenbur

Okay. What are the plans, and is there front coming to an end, can they hang in here for a couple of more years? Can you talk a little bit about what their plans are?

Lynn Dugle

Well, I can. But I’d also encourage you, I don’t speak for KKR and NGA. But we are not bumping up against any fund requirements. We don’t anticipate this is the month that the three-year lockup is complete, so it’s over and we think, of course, that with their strike price haven’t been in mid-40s that their plan is to stay with us here. As we get on that trajectory of growth and don’t anticipate any large movements on their part in the near-term.

Brian Ruttenbur

Okay. And then in terms of adjusted EPS in 2018, I joined the call late, I apologize, there was another call. But can you talk a little bit about what an adjusted EPS is? I heard the GAAP number, but I didn’t catch the adjusted EPS number?

Wayne Rehberger

Well, we haven’t given the adjusted EPS number. I think if you look at our guidance and look at the adjustment you’d make on the tax benefit, and then the amortization, you can get back to that.

Brian Ruttenbur

Okay, very good. And then adjusted EPS in the fourth quarter was what?

Wayne Rehberger

Adjusted EPS was a $1.62 negative.

Brian Ruttenbur

Okay.

Wayne Rehberger

But there was $2.16, mostly driven by the reevaluation of the tax asset in that $2.16. And we do break that out as well.

Brian Ruttenbur

Great, thank you very much.

Operator

Thank you. Our next question comes from the line of Ben Klieve with Noble Capital Markets. Ben, your line is open.

Christian Herbosa

Hi, thanks for taking my call. This is Christian Herbosa on for Ben. I just have one question. So last quarter you mentioned that you had a couple of large contracts under your protest, JITC and MSOC, you already mentioned MSOC, but where do you stand with JITC and – or there any other contracts under protest you think you should be awareness.

Lynn Dugle

And Christian, we don’t have anything under protest, nothing in backlog. So we’re not affected by any of that.

Christian Herbosa

Okay, thanks.

Operator

Thank you. And our next question comes from the line of Dan Drawbaugh with B. Riley FBR.

Dan Drawbaugh

Yes, thanks. This is Dan Drawbaugh on behalf of Christopher Van Horn. And Lynn, first of all congratulations on the appointment.

Lynn Dugle

Thank you.

Dan Drawbaugh

So I just have one question. You mentioned a couple of growth and employee investment initiatives that could be impacting margin a bit in 2017, how should we be thinking about the return on those investments rolling forward from there? And how you’re contemplating that in 2019? And also, I’m curious to know how you think those role onto the P&L in 2018, those additional investments?

Wayne Rehberger

So can I start and then Lynn…

Lynn Dugle

Yes.

Wayne Rehberger

So some of those investments have to do with the way we are and scenting our folks in our capture business development group. We have a new capture program – incentive program. There is also the way we are incenting the leaders of the organization, there’s a lot of leverage on the upside, if he overachieved plan. So I think that to answer your question, I think that the investment will pay off in terms of where we end up this year, both in submits and the amount of bookings we have relative to what we compensate people for, and – but you’ll see a little bit more of SG&A. That’s in there and maybe a little bit more stock comp as well.

Dan Drawbaugh

Okay, great. Thank you very much.

Operator

Thank you. And we have a follow-up from the line of Brian Kinstlinger with Maxim Group.

Brian Kinstlinger

Yes, great. On the $900 million protest that was withdrawn, so what’s the status now? Does that start all over? And so that is in your pipeline, now?

Lynn Dugle

Brian, I’m a little bit handcuffed, because we are currently working through an agreement that doesn’t allow me to make any statement specifically. But what is public is the government reevaluated and re-awarded to the company that originally won.

Brian Kinstlinger

I see. Okay, thank you.

Operator

Thank you. And that is all the time we have a questions for today. I’d like to turn the conference back over to Dave Spille for closing comments.

Dave Spille

Great. Thank you for joining us today. If you have any questions, please don’t hesitate to give me a call. We look forward to seeing many of you over the coming weeks and with that, we’ll end today’s call. Have a great night.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a great day.