NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS

 

Date:		Thursday, May 24, 2018; 12:00 P.M. Eastern Daylight Time
Format:		Live Audio Webcast

 

We are pleased to invite you to attend our 2018 Annual Meeting of Stockholders.   Items of Business   1.     To elect Katharina G. McFarland, Lynn A. Dugle, Charles S. Ream and David J. Topper as directors to hold office until the 2021 annual meeting of stockholders;   2.     To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the 2018 fiscal year;   3.     To approve, on a non-binding, advisory basis, the compensation of the Company’s named executive officers as disclosed in the proxy statement; and   4.     To transact such other business as may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting.   Meeting Format   This year’s annual meeting will be virtual, conducted via live audio webcast, available at www.vitualshareholdermeeting.com/EGL2018. On the website, you can also vote your shares, access the proxy materials, submit questions in advance and learn more about our Company.   Record Date   Only stockholders of record on our books at the close of business on Thursday, March 29, 2018 (the “Record Date”), will be entitled to vote at the Annual Meeting and any adjournments or postponements of the Annual Meeting.   Meeting Materials						VOTING INFORMATION
						Your vote is important to us. Please carefully review the proxy materials for the 2018 Annual Meeting of Shareholders and follow the instructions below to cast your vote on all of the voting matters.   How to Vote: Please vote using one of the following voting methods:
						Via the Internet www.vitualshareholdermeeting.com/EGL2018     Scan this QR code to vote with mobile device   By Phone Call 1-800-690-6903   By mail Sign, date and return your proxy card to   Engility Holdings, Inc. c/o Broadridge 51 Mercedes Way Edgewood, NY 11717

We are furnishing proxy materials to our stockholders over the Internet. On or about April 13, 2018, we mailed to all stockholders of record as of the Record Date a notice containing instructions on how to access our Annual Report to Stockholders, our proxy statement and proxy card. The notice also provides instructions on how you can request a paper copy of our proxy materials and Annual Report to Stockholders.

For questions on accessing proxy materials or voting, please call 1-800-579-1639.

By Order of the Board of Directors,

 

Thomas O. Miiller

Senior Vice President, General Counsel and

Corporate Secretary

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TABLE OF CONTENTS

 

Proxy Summary			1

Voting Matters and Board Recommendations			1

Corporate Governance Highlights			1

Directors and Nominees for Director			2

Proposal 1 – Election of Directors			3

Corporate Governance			11

Certain Relationships and Related Party Transactions			20

Executive Compensation			25

Stock Ownership of Certain Beneficial Owners and Management			48

Proposal 2 – Ratification of Independent Registered Public Accounting Firm			52

Proposal 3 – Advisory Vote on Executive Compensation			55

General Information			56

 

T A B L E  O F  C O N T E N T S

 

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PROXY SUMMARY

This summary highlights information contained elsewhere in this proxy statement. It does not contain all of the information that you should consider in voting your shares. You should carefully read the entire proxy statement, as well as our annual report on Form 10-K for the fiscal year ended December 31, 2017, before voting.

This proxy statement is being furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Engility Holdings, Inc., for use at the Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Thursday, May 24, 2018 at 12:00 p.m. eastern daylight time via live webcast, and any adjournments or postponements of the Annual Meeting. The Board is soliciting proxies for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. This proxy statement and the accompanying proxy card are being distributed and made available on or about April 13, 2018, to all stockholders of record as of the close of business on March 29, 2018.

 

Voting Matters and Board Recommendations

 

		Proposal		Board Voting Recommendation
I.		Election of four directors		FOR each nominee
II.		Ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2018		FOR
III.		Advisory vote to approve the Company’s executive compensation on an advisory basis		FOR

 

Corporate Governance Highlights

We believe that good corporate governance is integral to our business, and the Board monitors developments in governance best practices to assure that it continues meeting its commitment to representation of stockholder interests. Below is a summary of certain corporate governance practices and facts:

 

Annual Board and Chief Executive Officer Evaluations		All of our Non-Executive Directors Are Independent
Stock Ownership and Retention Guidelines for Executive Officers		Full Board and Committee Oversight of Risk Management
Compensation Packages Designed to Promote a Pay for Performance Culture		Comprehensive Code of Ethics and Business Conduct and Corporate Governance Guidelines
Anti-Hedging Policy for Directors and Officers		“Clawback” Policy Providing for Return of Performance-Based Compensation
Annual “Say-on-Pay” Advisory Votes		Board Participation in Executive Succession Planning
Active Stockholder Engagement		Board Oversight of Company Strategy

 

P R O X Y  S U M M A R Y

 

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Directors and Nominees for Director

The following table provides summary information regarding each nominee to the Board. Information about each director’s experience, qualifications and skills can be found beginning on page 6.

 

Committees

Name

Age

Director Since

Principal Occupation

Independent

AC

CC

NCGC

Other Public Company Boards

Steven A. Denning

69

2015

Chairman, General Atlantic

Chair

None

David M. Kerko

44

2015

Consultant, KKR

None

Darryll J. Pines

53

2012

Dean of the Clark School of Engineering, University of Maryland

None

William G. Tobin

80

2012

Managing Partner, Tobin Group

None

Peter A. Marino+

75

2015

Private Consultant

1

Anthony Principi

73

2012

Principal, The Principi Group

Chair

1

David A. Savner

73

2012

Partner, Jenner & Block LLP

None

Lynn A. Dugle*

58

2015

Chairman, President and Chief Executive Officer, Engility Holdings, Inc.

1

Charles S. Ream*

74

2012

Former EVP and CFO, Anteon International Corporation

Chair

None

John W. Barter, III

71

2017

Former Executive, AlliedSignal

2

David J. Topper**

60

2018

Operating Partner, General Atlantic

None

Katharina G. McFarland***

58

2017

Private Consultant and former Assistant Secretary of Defense (Acquisition), Dept. of the Army

None

Meetings in 2017:

9

4

3

Audit Committee (“AC”), Compensation Committee (“CC”), Nominating/Corporate Governance Committee (“NCGC”)

*Nominee for re- election at 2018 Annual Meeting.   **Nominee for initial election at 2018 Annual Meeting.   ***Nominee for initial election at 2018 Annual Meeting. Ms. McFarland joined Engility’s Board in July 2017.   +Lead Independent Director

 

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PROPOSAL 1 – ELECTION OF DIRECTORS

 

Directors and Nominees for Director			3
Nominees for Election to Board			6
Continuing Directors Until the 2019 Meeting			7
Continuing Directors Until the 2020 Meeting			9

Vote Required; Recommendation			10

 

Directors and Nominees for Director

Our Amended and Restated Bylaws provide that the number of directors shall be fixed from time to time exclusively by the Board, and shall be divided into three classes. The Board is currently composed of 11 directors.

On February 26, 2015, we completed the acquisition of TASC, Inc. (“TASC”), a leading professional services provider to the national security and public safety markets, in an all-stock transaction valued at approximately $1.3 billion, including the assumption of net debt of approximately $614 million. As a condition to the closing of the TASC acquisition, on February 26, 2015, we entered into a Stockholders Agreement with Birch Partners, LP (“Birch Partners”)¹, and for the limited purposes set forth therein, certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and certain investment funds affiliated with General Atlantic LLC (“GA” or “General Atlantic”) (the “Stockholders Agreement”), which establishes certain rights, restrictions and obligations of Birch Partners, KKR and GA, and sets forth certain governance and other arrangements relating to Engility, including the right of Birch Partners to designate (i) four directors for nomination to our Board for so long as each of KKR and GA (including their respective affiliates) beneficially owns at least 50% of the shares of our common stock it owned as of February 26, 2015, and (ii) two directors for nomination to our Board for so long as each of KKR and GA (including their respective affiliates) beneficially owns less than 50% but at least 25% of the shares of our common stock it owned as of February 26, 2015.

Pursuant to the Stockholders Agreement, we currently must include four director nominees designated by Birch Partners (or after a distribution by Birch Partners to the KKR investors and GA investors, KKR and/or GA, respectively) in the slate of nominees recommended by the Board for election of directors. In the event any Board member nominated by such stockholder party resigns or is unable to serve, the stockholder parties will be entitled to appoint a replacement stockholder party director. The four designees of Birch Partners as of the 2018 Annual Meeting are Messrs. Denning, Kerko, Marino and Topper (the “Birch Designees”).

In 2017, there was one remaining vacancy on the Board. The Board voted to fill the vacancy, adding Ms. McFarland to our Board in June 2017. On February 8, 2018, we and Birch Partners amended the Stockholders Agreement to allow the Board to increase to up to 14 members, up from its prior limit of 11 members. If Mr. Topper is elected to our Board at the 2018 Annual Meeting, the size of our Board will increase from 11 members to 12 members.

In addition to the four directors standing for election and/or re-election at the 2018 Annual Meeting, four directors’ terms will expire at each of the 2019 and 2020 annual meetings. In each case, directors are elected until their respective successors are duly elected and qualified or until their earlier death, resignation or removal. At each annual meeting, one class of directors is elected for a three-year term.

 

1	Supplementary information regarding the Stockholders Agreement with Birch Partners, LP, may be found in the Beneficial Ownership Tables on page 47 of the Proxy.

 

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Unless a proxy specifies otherwise, the persons named in the proxy will vote the shares covered thereby FOR the nominees as listed. Each nominee has consented to be a candidate and to serve, if elected. While the Board has no reason to believe that any nominee will be unavailable, if such an event should occur, it is intended that shares represented by proxies will be voted for substitute nominee(s) as selected by the Board.

We seek to ensure that our Board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow our Board to satisfy its oversight responsibilities effectively in light of our business and structure.

The Birch Designees, as noted above, were each a nominee designated by Birch Partners pursuant to the Stockholders Agreement.

When considering the experience, qualifications, attributes and skills of the Board, we focused primarily on the information discussed in each of the Board members’ biographical information set forth below.

 

•

With regards to Mr. Denning, his 35-year career with General Atlantic, where he is currently Chairman, provides Mr. Denning with a deep understanding of the strategic planning, corporate finance and public markets opportunities and challenges faced by growth companies like Engility. Mr. Denning also has served as a director of other private and public companies.

 

•

With regards to Ms. Dugle, she brings substantial operational and executive leadership experience in our industry and in particular in the intelligence community, including her prior service as the president of Raytheon Intelligence, Information and Services (“IIS”) until March 2015. Ms. Dugle’s thorough understanding of our business, strategy, industry and competitive environment was one of many factors that resulted in the Board naming her Chief Executive Officer of the Company in March 2016. She also has served as a director of other private companies as well as non-profit and industry-related organizations.

 

•

With regards to Mr. Kerko, his 17 years with KKR, where he served as an executive, has provided Mr. Kerko with significant experience advising emerging and established companies with respect to strategic planning, corporate finance and public markets strategy, particularly in the technology industry. Mr. Kerko also has served on the boards of a number of private companies and currently serves on the boards of Savant Systems and Transphorm Inc.

 

•

With regards to Mr. Marino, he has extensive experience in defense and intelligence industries, including as a former executive chairman of TASC. He also has served as a director of other private and public companies.

 

•

With regards to Dr. Pines, he has extensive experience in aerospace engineering. Dr. Pines has served in a number of leadership positions in academia and with the Defense Advanced Research Project Agency (“DARPA”).

 

•

With regards to Mr. Principi, he has extensive legal and government relations experience in the public and private sectors. Mr. Principi has served as Secretary of the U.S. Department of Veterans Affairs and in other senior positions with the U.S. government and in the private sector for over two decades. He also has served as a director of other private and public companies.

 

•

With regards to Mr. Ream, he has significant financial and accounting experience. Mr. Ream has served as the chief financial officer and in other leadership roles in various companies in the defense and aerospace industry. He has also served as a partner in a “Big Four” public accounting firm and as a director of other public companies.

 

•

With regards to Mr. Savner, he has significant legal and management experience. Mr. Savner was the chief legal officer of one of the largest U.S. defense contractors and is a partner with a major U.S. law firm.

 

 

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With regards to Mr. Tobin, he has significant management and consulting experience and expertise. Mr. Tobin has served in various leadership positions in major leadership and talent consulting firms, and served in the U.S. Armed Forces for two decades. He also has served as a director of other public companies.

 

•

With regards to Mr. Barter, he has significant financial and management expertise. Mr. Barter spent 20 years at AlliedSignal (now Honeywell) as the chief financial officer and chief executive officer for its $6 billion automotive division. Mr. Barter also currently serves on the board of directors for two other public companies – DHI Group, where he is board chair, and QTS Realty Trust, where he is chair of the audit committee.

 

•

With regards to Ms. McFarland, she brings substantial experience in defense acquisition, logistics and technology, in particular with the Department of Army, where she most recently served as the former Assistant Secretary of Defense for Acquisition, appointed by then President Barack Obama and confirmed by the U.S. Senate. During that same tenure, Ms. McFarland was also appointed as the Acting Assistant Secretary of the Army for Acquisitions, Logistics & Technology. Prior to her tenure with the Department of Army, Ms. McFarland served as an engineer in the U.S. Marine Corps.

 

•

With regards to Mr. Topper, he provides Engility with deep insight into capital markets and mergers and acquisitions, based on his nearly 40 years of experience in investment banking and private equity. Mr. Topper’s experience includes his current position as Operating Partner with General Atlantic, as well as his prior capital markets leadership roles with J.P. Morgan and Morgan Stanley. Mr. Topper also brings insights gained through his current and prior service on multiple other boards.

 

Name		Age(1)		Position		Annual Meeting at Which     Term Will Expire
Steven A. Denning		69		Director		2019
Lynn A. Dugle		58		Chairman		2021
David M. Kerko		44		Director		2019
Peter A. Marino		75		Lead Independent Director		2019
Darryll J. Pines		53		Director		2019
Anthony Principi		73		Director		2019
Charles S. Ream		74		Director		2021
David A. Savner		73		Director		2019
William G. Tobin		80		Director		2019
John W. Barter, III		71		Director		2019
David J. Topper		60		Director Nominee		2021
Katharina G. McFarland		58		Director		2021
(1) As of March 29, 2018.

 

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Nominees for Election to Board

 

Lynn A. Dugle                   Director since 2015
		Ms. Dugle has served as a director on our Board since February 26, 2015, and as our Chief Executive Officer since March 2016. Ms. Dugle was appointed further as President in June 2017, and then as Board Chairman in February 2018. Ms. Dugle previously served as a member of our Audit Committee from February 2015 to March 2016. Ms. Dugle was a director of TASC from October 2014 to February 2015. Ms. Dugle joined Raytheon Company, a publicly traded company specializing in defense and other government markets throughout the world, in April 2004 and served as the Vice President of Raytheon Company and President of Raytheon IIS until March 2015. She became President of the former Intelligence and Information Systems business in January 2009 and was previously its Vice President and Deputy General Manager. Ms. Dugle serves as a director and member of the Audit and Technology Committees of State Street Corporation, and the Professional Services Council.
Charles S. Ream                   Director since 2012
		Mr. Ream has served as a director on our Board and as chair of our Audit Committee since 2012 and served as a member of our Compensation Committee from 2012 to February 2015. Mr. Ream was Executive Vice President and Chief Financial Officer of Anteon International Corporation, an international information technology firm, until his retirement in 2006. Prior to joining Anteon International Corporation in 2003, Mr. Ream was Senior Vice President and Chief Financial Officer of Newport News Shipbuilding, Inc., from 2000 through 2001. Prior to joining Newport News Shipbuilding, Mr. Ream served as Senior Vice President of Finance of Raytheon Systems Company from 1998 through 2000 and served as Chief Financial Officer of Hughes Aircraft Company from 1994 through 1997. Prior to joining Hughes Aircraft Company, Mr. Ream was a Partner at Deloitte & Touche LLP. Mr. Ream previously served as Audit Committee Chairman of Truvan Health Analytics, Inc., a portfolio company of Veritas Capital, and as a director of AeroFlex Holdings Corp., Allied Defense Group, Inc., Vencore, Inc., Vangent, Inc., Stanley, Inc., DynCorp International, Inc. and Stewart & Stevenson Services, Inc. Mr. Ream received a Bachelor of Science in Accounting from the University of Arizona and a Master of Accounting from the University of Arizona. Mr. Ream is a Certified Public Accountant (inactive).

 

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Katharina G. McFarland                   Director since 2017
		Katharina McFarland became a member of Engility’s Board of Directors on June 30, 2017. Prior to joining Engility, she retired from civil service as the Assistant Secretary of Defense for Acquisition on January 20, 2017. She was appointed to this position in 2012 by then President Barack Obama and confirmed by the U.S. Senate. During her ASD tenure, she was also appointed Acting Assistant Secretary of the Army for Acquisitions, Logistics & Technology and Army Acquisition Executive. Prior to her 2012 ASD appointment, McFarland served as President of the Defense Acquisition University from November, 2010 to May, 2012. From May, 2006 to November, 2010, she was the Director of Acquisition, Missile Defense Agency. McFarland began her civil service career in 1986 at Headquarters, U.S. Marine Corps as a general engineer. McFarland received an Honorary Doctoral degree in Engineering from the University of Cranfield, United Kingdom, and a Bachelor of Science degree from Queens University in Kingston, Canada, with accreditations in Materials, Electronics and Civil Engineering.
David J. Topper                   Director Nominee
		Mr. Topper is nominated for election to our Board at the 2018 Annual Meeting. He is an Operating Partner at General Atlantic, a growth equity investment management firm with $25 billion in capital under management. Mr. Topper also serves on the board of directors at Amherst Pierpont Securities and is a former director of MeteoGroup and Affinion. Prior to General Atlantic, Mr. Topper was Co-Head of Equity Capital Markets at J.P. Morgan. During his time at J.P. Morgan, David was Chairman of the Commitments Committee, led many of the firm’s major advisory and capital raising transactions in the financial institutions, healthcare, media and other sectors and worked with the U.S. Treasury and other regulatory agencies on crisis related issues. Prior to joining J. P. Morgan, Mr. Topper spent 22 years at Morgan Stanley where he served as Co-Head of U.S. Equity Capital Markets, Managing Director and Chairman of the Equity Commitment Committee and numerous other senior management positions in Debt Capital Markets, Leverage Finance and Mergers and Acquisitions. Mr. Topper also serves on the Board of the Duke University Trinity College of Arts and Sciences, the Advisory Board of the Stanford Institute for Economic Policy Research, the Board of Directors of the Adams Memorial Foundation. He holds a B.A. from Duke University and an M.B.A. from Stanford University.

Continuing Directors Until the 2019 Meeting

 

Steven A. Denning                   Director since 2015
		Mr. Denning has served as a director on our Board and as a member of our Compensation Committee since February 26, 2015. Mr. Denning was a director of TASC from 2010 until February 2015. He is the chairman and managing director of General Atlantic Service Company, LLC. He joined the firm in 1980 and has helped build the organization into one of the leading global equity investment firms focused exclusively on investing in growth companies. Previous board roles include The Thomson Reuters Corporation, Gavilon Holdings, LLC, Genpact Limited and IHS, Inc., along with several other public and private companies.

 

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David M. Kerko                   Director since 2015
		Mr. Kerko has served as a director on our Board and as a member of our Nominating/ Corporate Governance Committee since February 2015. Mr. Kerko has served as a consultant to KKR since February 2015. Mr. Kerko was a director of TASC from 2009 until February 2015, and until February 2015 Mr. Kerko was an executive of KKR. Mr. Kerko joined KKR in 1998 and is a former member of the Technology industry team within KKR’s Private Equity platform. He was actively involved in KKR’s investments in Borden, Toys ‘R’ Us, TASC, NXP (formerly Philips Semiconductor), Savant and Sonos. Mr. Kerko also serves on the board of directors of Aceco, Savant, Sonos and Transphorm Inc. Prior to joining KKR, Mr. Kerko was with Gleacher NatWest Inc., where he was involved in a broad range of merger and acquisition transactions and financing work. He holds a B.S. and B.S.E., summa cum laude, from the University of Pennsylvania.
Darryll J. Pines                   Director since 2012
		Dr. Pines has served as a director on our Board and as member of our Audit Committee and our Nominating/Corporate Governance Committee since 2012. Dr. Pines is Dean of the Clark School of Engineering at the University of Maryland and the Farvardin Professor of Aerospace Engineering. Prior to becoming Dean of the Clark School of Engineering, Dr. Pines served as Chair of the Department of Aerospace Engineering from 2006 through 2009 and as a Professor and Assistant Professor in the Clark School of Engineering from 1995 through 2003. From 2003 through 2006, Dr. Pines also served as Program Manager of the Tactical Technology Office and Defense Sciences Office for DARPA. Dr. Pines currently serves as a member of the board of directors of Aurora Flight Services, which he joined in 2014. Dr. Pines received a Bachelor of Science in Mechanical Engineering from the University of California at Berkeley, and a Master of Science and Ph.D. in Mechanical Engineering from the Massachusetts Institute of Technology.
William G. Tobin                   Director since 2012
		Mr. Tobin has served as a director on our Board and as chair of our Compensation Committee since 2012 and as a member of our Nominating/Corporate Governance Committee since March 2016. Mr. Tobin previously served as a member of our Audit Committee from 2012 until February 2015. Mr. Tobin founded The Tobin Group, a management consulting group, in 2003 and continues as its Managing Partner and Director. Previously, Mr. Tobin was Managing Director and Chairman of the Defense & Aerospace practice of Korn/Ferry International from 1986 through 2003. From 1981 through 1985, Mr. Tobin was Founding Partner of The Tobin Group. Prior to founding The Tobin Group, Mr. Tobin served as an officer in the U.S. Army for 20 years. Mr. Tobin is a former director of DynCorp International, Inc., Integrated Defense Technology, Vertex Aerospace and WorldStore International and an Advisory Board Member of Veritas Capital. Mr. Tobin received a Bachelor of Science in Engineering from the U.S. Military Academy, West Point, a Master of Arts in International Relations from the Elliot School of International Affairs at George Washington University and a Master of Business Administration from Long Island University.

 

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Continuing Directors Until the 2020 Meeting

 

Peter A. Marino                   Director since 2015
		Mr. Marino has served as a director, Co-Chairman of our Board and as a member of our Compensation Committee since February 2015, and as a member of our Nominating/Corporate Governance Committee since March 2016. Mr. Marino was a director of TASC from 2010 to February 2015. From 2011 to 2015, he served as the chairman of the TASC board. Since 1999, Mr. Marino has been working as a private consultant for government and industry on defense and intelligence issues in addition to serving on several boards. Mr. Marino serves on the board and member of the audit and nominating/corporate governance committee of Quality Technology Services, and on the board of IDSS and Catapult Consultants and on the proxy boards for Inmarsat Government and DRS Technologies, Inc. Mr. Marino has also chaired the proxy boards for BEI Precision and QinetiQ North America. Mr. Marino has held senior executive positions with Fire Arms Training Systems, E–Systems, Inc. and Lockheed Martin Corporation and, for over 16 years, served in a number of senior positions at the Central Intelligence Agency.
Anthony Principi                   Director since 2012
		Mr. Principi has served as a director on our Board and as a member of our Nominating/ Corporate Governance Committee since 2012 (and as chair since February 2015) and as a member of our Audit Committee since March 2016. Mr. Principi previously served as a member of our Compensation Committee from 2012 to February 2015. Mr. Principi serves as Principal of the Principi Group, a consulting firm, and as a Chairman of the Spectrum Group. From 2005 through 2010, he was Senior Vice President of Government Relations of Pfizer, Inc., a biopharmaceutical company. Prior to joining Pfizer, Inc., Mr. Principi served as Secretary of the U.S. Department of Veterans Affairs from 2001 through 2005. In 2005, he served as the Chairman of the Defense 2005 Base Realignment and Closure Commission. Prior to becoming Secretary of the U.S. Department of Veterans Affairs, Mr. Principi was President of QTC Medical Services Inc. from 1999 through 2001 and Senior Vice President of Lockheed Martin IMS from 1995 through 1996. Prior to joining Lockheed Martin IMS, Mr. Principi was Chief Counsel and Staff Director of the U.S. Senate Armed Services Committee from 1993 through 1994, and was Chief Counsel and Staff Director of the U.S. Senate Committee on Veterans’ Affairs from 1984 through 1988. Mr. Principi also served as a director and member of the Corporate Governance and Compensation and Evaluation Committees of Mutual of Omaha, as a director of GetWellNetwork, Inc. and as a director and member of the Nominating and Corporate Governance Committee of Imprimis Pharmaceuticals, Inc. Mr. Principi previously served as Executive Chairman of QTC Management and was a director of Perot Systems Corporation and Cleveland BioLabs, Inc. Mr. Principi received a Bachelor of Science from the U.S. Naval Academy and a Juris Doctor from Seton Hall University School of Law.

 

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David A. Savner                   Director since 2012
		Mr. Savner has served as a director on our Board since 2012, as Co-Chairman of our Board since February 2015, as a member of our Compensation Committee since February 2015 and as a member of our Audit Committee since March 2016. From 2012 until February 2015, Mr. Savner was chair of our Nominating/Corporate Governance Committee. Mr. Savner is a Partner with the law firm of Jenner & Block LLP, and a member of its Corporate Practice. Prior to rejoining Jenner & Block, Mr. Savner was Senior Vice President, General Counsel and Secretary of General Dynamics, an aerospace and defense company, from 1999 to 2009. Prior to joining General Dynamics, Mr. Savner was a Partner of Jenner & Block and Chair of its Corporate Practice. Mr. Savner received a Bachelor of Arts from Northwestern University and a Juris Doctor from Northwestern University School of Law.
John W. Barter, III                   Director since 2017
		Mr. Barter has served as a director on our Board and a member of our Audit Committee since January 3, 2017. Mr. Barter has more than 25 years of experience in financial management, mergers and acquisitions, executive management and planning and analysis. From 1988 to 1994, he was Senior Vice President and Chief Financial Officer of AlliedSignal, Inc., now known as Honeywell International, Inc., an advanced technology and manufacturing company. From October 1994 until his retirement in December 1997, Mr. Barter was Executive Vice President of AlliedSignal, Inc., and President of AlliedSignal Automotive. After retiring from AlliedSignal, Inc., Mr. Barter served briefly as Chief Financial Officer of Kestrel Solutions, Inc., a privately-owned early stage company established to develop and bring to market a new product in the telecommunications industry, from January 2000 to May 2001. Mr. Barter served on the board of directors of TASC, Inc., until February 26, 2015, and currently serves on the board of directors of DHI Group Inc., where he is board chair and chair of the nominating and corporate governance committee, and QTS Realty Trust, Inc., where he is chair of the audit committee.

 

Vote Required; Recommendation

The affirmative vote of a plurality of the votes cast at the Annual Meeting is required to approve the election of each of the nominees for election as a director. All nominees for election as directors at the Annual Meeting currently serve on the Board. If no voting specification is made on a properly returned or voted proxy card, the proxies will vote FOR the election of the Hon. Katharina G. McFarland, Lynn A. Dugle, Charles S. Ream, and David J. Topper as directors to hold office until the 2021 annual meeting of stockholders and until their respective successors are elected and qualified. Abstentions and broker non-votes will have no effect on Proposal 1 because they are not considered votes cast.

The Board unanimously recommends that stockholders vote “FOR” each of the director nominees.

 

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Director Independence

Our Board, upon recommendation of the Nominating/Corporate Governance Committee of our Board (the “Governance Committee”), has determined that the following directors are independent, representing each of our non-executive directors: John W. Barter, III, Steven A. Denning, David M. Kerko, Peter A. Marino, Darryll J. Pines, Anthony Principi, Charles S. Ream, David A. Savner, William G. Tobin, Katharina G. McFarland and David J. Topper. Our Board annually determines the independence of directors based on a review by the Board and the Governance Committee. No director will be considered independent unless the Board affirmatively determines that he or she has no material relationship with us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. To evaluate the materiality of any such relationship, the Board has determined it is in the best interests of the Company to adopt categorical independence standards that are set forth in the Corporate Governance Guidelines.

The Board also considers certain objective standards in affirmatively determining whether a director is independent, including those objective standards set forth in the NYSE rules. For 2017, the Board specifically considered (i) that Messrs. Marino, Denning, Kerko and Topper were nominated pursuant to the Stockholders Agreement by Birch Partners, the owner of approximately 50.9% of our outstanding common stock as of March 29, 2018, (ii) Mr. Marino’s former position as Executive Chairman of TASC prior to the completion of the TASC acquisition, (iii) Mr. Denning and Mr. Topper’s leadership positions with GA and Mr. Kerko’s former position as an executive of KKR, and that GA and KKR through Birch Partners beneficially own approximately 50.9% of our outstanding common stock as of March 29, 2018 and (iv) Mr. Barter’s former position as Director of TASC. The Board considered the above relationships of Messrs. Marino, Denning, Topper, Kerko and Barter and affirmatively determined that these relationships did not impair their independence.

 

Committees of the Board of Directors

The primary standing committees of our Board include an Audit Committee, a Compensation Committee and a Governance Committee each as further described below. Each of these committees is composed exclusively of directors who are independent as defined in the NYSE listing standards. In addition, the Board has established a subcommittee of our Compensation Committee consisting of Messrs. Savner and Tobin for purposes of approving any compensation that may otherwise be subject to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) (to the extent such compensation still qualifies for the “performance-based” compensation exception to Section 162(m) of the Code), and for purposes of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Other committees may also be established by the Board from time to time. Committee membership shown below is as of the date of this proxy statement.

 

		Audit Committee		Compensation Committee		Nominating/Corporate Governance Committee
Steven A. Denning
Lynn A. Dugle
David M. Kerko
Peter A. Marino
Darryll J. Pines

 

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		Audit Committee		Compensation Committee		Nominating/Corporate Governance Committee
Anthony Principi
Charles S. Ream
David A. Savner
William G. Tobin
John W. Barter, III
Katharina G. McFarland
David J. Topper
Chairperson   Member   Financial Expert   Lead Independent Director

Audit Committee. The Audit Committee of our Board (the “Audit Committee”) has the responsibility, among other things, to meet periodically with management and with both our independent auditor and internal auditor to review audit results and the adequacy and effectiveness of our system of internal controls. In addition, the Audit Committee appoints or discharges our independent auditor, reviews and approves auditing services and permissible non-audit services to be provided by the independent auditor in order to evaluate the impact of undertaking such added services on the independence of the auditor and reviews and approves or ratifies transactions with related persons. The responsibilities of the Audit Committee are more fully described in our Audit Committee charter, which is posted on our website at www.engility.com and will be available in print to any stockholder who requests it. All members of the Audit Committee are independent and financially literate. Further, the Board affirmatively determined that Messrs. Ream and Barter possess accounting or related financial management expertise within the meaning of the NYSE listing standards and that both individuals qualify as “audit committee financial experts” as defined under the applicable Securities and Exchange Commission (“SEC”) rules. In 2017, the Audit Committee met nine times.

Compensation Committee. The Compensation Committee of our Board (the “Compensation Committee”) oversees all compensation and benefit programs and actions that affect our executive officers and directors. The Compensation Committee also provides strategic direction for our overall compensation structure, policies and programs. Pursuant to the Compensation Committee’s charter, the Compensation Committee is entitled to delegate any or all of its responsibilities to a subcommittee of the Compensation Committee, consisting of one or more independent members of the Compensation Committee. The Board has established a subcommittee of our Compensation Committee consisting of Messrs. Savner and Tobin for purposes of approving any compensation that may otherwise be subject to Section 162(m) of the Code (to the extent such compensation still qualifies for the “performance-based” compensation exception to Section 162(m) of the Code) and for purposes of Section 16 of the Exchange Act. The responsibilities of the Compensation Committee are more fully described in the Compensation Committee charter, which is posted on our website at www.engility.com and will be available in print to any stockholder who requests it. Each member of the Compensation Committee is an independent, non-employee director, and there are no Compensation Committee interlocks involving any of the members of the Compensation Committee. In 2017, the Compensation Committee met four times.

Nominating/Corporate Governance Committee. The Governance Committee is responsible for developing and recommending to the Board criteria for the selection of director candidates; identifying, reviewing the qualifications of and proposing candidates for election to the Board, including the evaluation of candidates for the Board recommended by the Company’s stockholders in accordance with the instructions set forth under “Stockholder Nominees” below; reviewing the performance of incumbent directors in

 

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determining whether to recommend them for reelection to the Board; considering questions of independence and possible conflicts of interest of incumbent directors and executive officers; overseeing the annual performance review of the Company’s Chief Executive Officer; and overseeing and approving the continuity planning process. The Governance Committee also reviews and recommends action to the Board on matters involving corporate governance and, in general, oversees the evaluation of the Board. The responsibilities of the Governance Committee are more fully described in the Governance Committee charter, which is posted on our website at www.engility.com and will be available in print to any stockholder who requests it. Each member of the Governance Committee is independent. In 2017, the Governance Committee met three times.

 

Executive Sessions

Our Corporate Governance Guidelines provide that non-management directors shall meet at regularly scheduled executive sessions, which will typically occur at regularly scheduled Board meetings, without any member of management present. In addition, at least annually, the independent directors will meet in separate executive session. Our Lead Independent Director Peter A. Marino presides over all executive sessions of the non-management directors. Our Corporate Governance Guidelines also provide that the executive sessions shall serve as the forum for the annual evaluation of the performance of the Company’s Chief Executive Officer, the annual review of the Chief Executive Officer’s plan for management succession and the annual evaluation of the performance of the Board.

 

Criteria for Director Nominations

Our Board is responsible for nominating directors for election by stockholders. Subject to the requirements of the Stockholders Agreement, in nominating a slate of directors, our Board, with the assistance of the Governance Committee, will take into account (a) minimum individual qualifications, including strength of character, mature judgment, industry knowledge or experience and an ability to work collegially with the other members of our Board, and (b) all other factors it considers appropriate, which may include ensuring that the Board, as a whole, is appropriately diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience and financial and accounting experience to enable the Governance Committee to determine whether the director candidate would be suitable for membership on the Company’s Audit Committee (including as an “audit committee financial expert”). The Board should monitor the mix of specific experience, qualifications and skills of its directors in order to assure that the Board, as a whole, has the necessary tools to perform its oversight function effectively in light of the Company’s business and structure. The Governance Committee also may consider the extent to which a director candidate would fill a present need on the Board.

When seeking candidates for director, the Governance Committee may solicit suggestions from incumbent directors, management or others, including stockholders. Individuals recommended by stockholders for nomination as a director should be submitted to the Company’s Corporate Secretary and, if submitted in accordance with the procedures set forth in this proxy statement and the Company’s Amended and Restated Bylaws, will be forwarded to the Governance Committee. The Governance Committee will review all candidates in the same manner, regardless of the source of the recommendation. After conducting an initial evaluation of a candidate, the Governance Committee will interview that candidate if it believes the candidate might be suitable to be a director. The Governance Committee may also ask the candidate to meet with management. If the Governance Committee believes a candidate would be a valuable addition to the Board, it will recommend to the full Board such candidate’s election.

 

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Stockholder Nominees

Our Amended and Restated Bylaws provide that stockholders seeking to nominate candidates for election as directors or to bring business before an annual or special meeting of stockholders must provide timely notice of their proposal in writing to the Corporate Secretary of the Company. Generally, to be timely, a stockholder’s notice must be received at our principal executive offices, addressed to the Corporate Secretary of the Company, and within the following time periods:

 

•

In the case of an annual meeting, no earlier than 120 days and no later than 90 days prior to the first anniversary of the date of the preceding year’s annual meeting; provided, however, that if the annual meeting is convened more than 30 days prior to or delayed by more than 70 days after the first anniversary of the preceding year’s annual meeting, or no annual meeting was held during the preceding year, to be timely the stockholder notice must be received no earlier than 120 days before such annual meeting and no later than the close of business on the later of (i) the 90th day before such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made; and

 

•

In the case of a nomination of a person or persons for election to the Board at a special meeting of the stockholders called for the purpose of electing directors, no earlier than 120 days before such special meeting and no later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement of the date of such meeting is first made.

In no event shall an adjournment or postponement of a meeting of the stockholders for which notice has been given commence a new time period (or extend any time period) for the giving of the stockholder notice. You should consult our Amended and Restated Bylaws for more detailed information regarding the process by which stockholders may nominate directors. Our Amended and Restated Bylaws are posted on the Corporate Governance portion of our website located at www.engility.com.

 

Board Leadership Structure

The Board is responsible for determining the optimal leadership structure in order to provide independent oversight of senior management. Accordingly, the Board evaluates its leadership structure on an annual basis. The Board believes that no single leadership model is right for all companies at all times. In evaluating its leadership structure, the Board considers our current operating and governance environment, governance best practices and feedback from our shareholders on how the Board can provide effective oversight of senior management on behalf of our shareholders. Based on these considerations, the Board has determined that a combined position for Chairman and CEO, coupled with a Lead Independent Director, provides an efficient and effective leadership model, fostering clear accountability, differing perspectives and effective decision making.

 

Board’s Role in Risk Oversight

Risk is inherent with every business. Management is responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. Our Board oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. A fundamental aspect of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of the full Board in setting our business strategy is a key part of its assessment of management’s appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company.

 

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In 2017, we conducted an annual enterprise risk management assessment led by our Vice President of Internal Audit, who reports directly to our Audit Committee. In this process, we assessed risk throughout the Company by surveying both key employees and the members of our Board, soliciting information regarding business risks that could significantly adversely affect the Company. Our Vice President of Internal Audit then prepared a report for the Board, which identified the key risks and outlined management’s plan to manage these risks. In addition, senior management attends the quarterly Board meetings and is available to address any questions or concerns raised by the Board regarding risk management and any other matters. Each quarter, the Board also receives presentations from senior management on strategic matters involving our operations.

While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board assist the Board in fulfilling its oversight responsibilities in certain areas of risk. In particular, the Audit Committee focuses on financial and enterprise risk exposures, including internal controls, and discusses with management, our Vice President of Internal Audit, our Corporate Compliance Officer, our Corporate Ethics Officer and our independent registered public accounting firm, our policies with respect to risk assessment and risk management. The Audit Committee also assists the Board in fulfilling its duties and oversight responsibilities relating to the Company’s compliance with applicable laws and regulations, the Code of Conduct and related Company policies and procedures. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs as described on page 26 of this proxy statement in “Executive Compensation—Compensation Discussion and Analysis.”

 

Board Meetings and Committees; Policy Regarding Director Attendance at Annual Meetings of Stockholders

During 2017, our Board held four meetings. All directors attended at least 75% of the Board meetings and meetings of the committees of the Board on which the director served, held during the period for which he or she served as a director. It is our policy that directors are strongly encouraged to attend the Company’s annual stockholder meetings. At the 2017 annual meeting of stockholders, all of the directors serving on our Board attended the meeting.

 

Code of Ethics and Business Conduct

We have a Code of Conduct that is applicable to all our directors, officers and employees. The Code of Conduct is available on the Corporate Governance page of our website at www.engility.com. To the extent required, pursuant to applicable SEC regulations, we intend to post amendments to or waivers from our Code of Conduct (to the extent applicable to our principal executive officer, principal financial officer or principal accounting officer) at these locations on our website or report the same on a Current Report on Form 8-K. Our Code of Conduct is available free of charge upon request to our Corporate Secretary, Engility Holdings, Inc., 4803 Stonecroft Boulevard Chantilly, VA 20151.

 

Compensation Committee Interlocks and Insider Participation

The members of our Compensation Committee in fiscal 2017 were Messrs. Denning, Marino, Savner and Tobin. All members of the Compensation Committee in fiscal 2017 were independent within the meaning of the NYSE listing standards, and no member was an employee or former employee of the Company. During fiscal 2017, no member of the Compensation Committee had any relationship requiring disclosure under the section “Certain Relationships and Related Party Transactions.” None of our executive officers served during fiscal 2017 as a member of the compensation committee (or other committee serving an equivalent function) of any

 

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other entity, one of whose executive officers served as a director on the Board or as a member of the Compensation Committee. None of our executive officers served during fiscal 2017 as a director of any other entity, one of whose executive officers served as a member of the Compensation Committee.

 

Communication with the Board of Directors

Our stockholders and other interested parties may communicate directly with any chair of the Audit, Governance and Compensation Committees, or to the non-management directors as a group. All communications should be in written form and directed to Thomas O. Miiller, Senior Vice President, General Counsel and Corporate Secretary, Engility Holdings, Inc., 4803 Stonecroft Boulevard Chantilly, VA 20151.

Complaints or concerns about our accounting, internal accounting controls and auditing matters, including those regarding the circumvention or attempted circumvention of internal accounting control or that would otherwise constitute a violation of the Company’s accounting policies, may be reported anonymously to our Audit Committee by writing to Engility Holdings, Inc., Attention: Audit Committee, 4803 Stonecroft Boulevard Chantilly, VA 20151. Company employees must report any such accounting allegation in accordance with the Company’s Whistleblower Policy. The Company prohibits any employee from retaliating or taking any adverse action against anyone for raising or helping to resolve any integrity questions.

 

Director Compensation

Directors who also serve as employees of the Company do not receive payment for services as directors. The Compensation Committee is responsible for reviewing and making recommendations to the Board regarding all matters pertaining to compensation paid to our directors for Board, committee and committee chair services. Under the Compensation Committee’s charter, the committee is authorized to engage consultants or advisors in connection with its review and analysis of director compensation.

In making non-employee director compensation recommendations, the Compensation Committee takes various factors into consideration, including, but not limited to, the responsibilities of directors generally, as well as committee chairs, and the forms of compensation paid to directors by comparable companies. The Board reviews the recommendations of the Compensation Committee and determines the form and amount of director compensation.

The 2017 compensation program for our non-employee directors is described further below.

The Board believes that our non-employee directors’ compensation program:

 

•

Ties a significant portion of directors’ compensation to stockholder interests because the value of restricted stock units fluctuates up or down depending on our stock price;

 

•

Focuses on the long term, since the shares underlying restricted stock unit awards generally are not delivered until after the director leaves the Board;

 

•

Is simple to understand and communicate; and

 

•

Is equitable based on the work required of directors, as the level of cash retainer varies depending on the specific responsibilities of the directors.

 

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2017 Director Compensation Program

Non-employee director compensation in fiscal 2017 consisted of an annual cash retainer of $75,000 and an annual equity award of restricted stock units with a grant date fair value of $100,000 and a one-year cliff vesting. Under our fiscal 2017 non-employee director compensation program, we also paid an annual cash retainer for serving as a Board chairperson of $40,000, an annual cash fee for serving as chair of the Audit Committee of $20,000, an annual cash fee for serving as chair of the Compensation Committee of $15,000, an annual cash fee for serving as chair of the Governance Committee of $10,000, an annual cash fee for serving as an Audit Committee member of $10,000, an annual cash fee for serving as a Compensation Committee member of $7,500 and an annual cash fee for serving as a Governance Committee member of $5,000.

The following table details the total compensation of the Company’s non-employee directors for the year ended December 31, 2017.

 

Director		Fees Earned or Paid in Cash ($)				Stock Awards ($) (1)				All Other Compensation ($)		Total ($)
Peter A. Marino			127,500				100,000			–			227,500
John W. Barter III			85,000				100,000			–			185,000
Katharina G. McFarland			37,500				91,666			–			129,166
Darryll J. Pines			90,000				100,000			–			190,000
Anthony Principi			95,000				100,000			–			195,000
Charles S. Ream			95,000				100,000			–			195,000
David A. Savner			132,500				100,000			–			232,500
William G. Tobin			95,000				100,000			–			195,000
(1)  Represents the grant date fair value of restricted stock units calculated in accordance with FASB ASC Topic 718. The Company granted these restricted stock units to its directors under the Engility Holdings, Inc. Amended and Restated 2012 Long Term Performance Plan.   The Company cautions that the amounts reported for these awards may not represent the amounts that the directors will actually realize from the awards. Whether, and to what extent, a director realizes value will depend on the Company’s performance and stock price, and continued service on our Board.

Following its annual review of our director compensation program, the Board, upon the recommendation of the Compensation Committee and its independent compensation consultant, Frederic W. Cook & Co., Inc. (“FW Cook”), did not modify our non-employee director compensation for fiscal year 2017. Each of Steven A. Denning and David M. Kerko has waived his compensation as a director of the Company, and therefore is not included in the table above.

 

Our Executive Officers

The following table sets forth the information as of March 29, 2018, regarding our executive officers.

 

Name		Age				Position(s)
Lynn A. Dugle			58			President and Chief Executive Officer
Wayne M. Rehberger			61			Senior Vice President and Chief Financial Officer
Thomas O. Miiller			61			Senior Vice President, General Counsel and Corporate Secretary
Susan M. Balaguer			49			Senior Vice President and Chief Human Resources Officer

Lynn A. Dugle—See the bio for Ms. Dugle on page 6 above.

 

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Wayne M. Rehberger—Mr. Rehberger has served as our Senior Vice President and Chief Financial Officer since our acquisition of TASC in February 2015. He had previously served as Senior Vice President and Chief Financial Officer of TASC since June 2010. Mr. Rehberger has more than 30 years of diversified financial, operational and sales management experience. Prior to joining TASC in June 2010, he was the Chief Operating Officer of XO Communications, a facilities-based telecommunications services provider. Before taking on the role of Chief Operating Officer in May 2004, Mr. Rehberger had served as XO Communications’ Chief Financial Officer since November 2000. From June 1986 until March 2000, Mr. Rehberger was affiliated with MCI Communications, where he held several broad financial roles, including Senior Vice President of Finance. Mr. Rehberger began his corporate career with the KPMG consulting business in Washington, D.C., where he worked primarily with U.S. government agencies and defense contractors. Mr. Rehberger also served for 10 years in the United States Army and Army Reserve, achieving the rank of major. He earned a Master of Business Administration at the University of South Carolina and a Bachelor of Science degree in Business Administration at Bucknell University.

Thomas O. Miiller—Mr. Miiller has served as our Senior Vice President, General Counsel and Corporate Secretary since 2012. Mr. Miiller previously served as Senior Vice President and General Counsel of L-3 Services Group since he rejoined L-3 Communications Holdings, Inc. (“L-3”) in December 2004. He had previously served in various legal positions within L-3 and its predecessor companies from 1987 through 2000. In the years prior to rejoining L-3, Mr. Miiller was Vice President, General Counsel and Secretary of Allied Aerospace, Inc., a privately held defense aerospace company. Before joining L-3 in 1987, Mr. Miiller was an attorney in the Dykema Gossett law firm in Washington D.C. Mr. Miiller has a Bachelor’s degree in Political Science from the University of Utah and a Juris Doctor’s degree from the National Law Center, George Washington University.

Susan M. Balaguer—Ms. Balaguer joined our Company in May 2016 and serves as our Senior Vice President and Chief Human Resources Officer. Prior to that time, Ms. Balaguer served as Senior Vice President, Human Resources Operations for CACI International, Inc., a government contractor providing information solutions and services for intelligence, defense and federal civilian customers, beginning in 2014. Prior to joining CACI, Ms. Balaguer served as the Vice President of Human Resources at ASRC Federal from 2013 to 2014 and as the Executive Vice President of Business Services at the VT Group from 2009 to 2013. Before joining the VT Group, Ms. Balaguer spent 20 years at Raytheon Company in progressively senior roles. Ms. Balaguer holds a Bachelor’s degree in Applied Management from Tri-State University.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Stockholders Agreement			20
Other Relationships			23

In accordance with its charter, unless otherwise approved or ratified pursuant to the “Related Person Transaction Policy,” our Audit Committee, or the disinterested members of our Board, reviews and approves all related party transactions. Prior to its approval of any related party transaction, the Audit Committee or the disinterested directors will discuss the proposed transaction with management, including the nature of the related person’s interest in the transaction and all material terms and conditions of the transaction.

 

Stockholders Agreement

As discussed above, on February 26, 2015, the Company entered into the Stockholders Agreement with Birch Partners, certain investment funds affiliated with KKR and certain investment funds affiliated with GA. The Stockholders Agreement became effective upon the closing of the TASC acquisition and sets forth certain arrangements and contains various provisions relating to, among other things, standstill restrictions, voting restrictions, board representation, transfer restrictions and registration rights, described further below.

Each of Birch Partners, KKR and GA are affiliates of the Company. Birch Partners received 18,796,791 shares, or approximately 50.9%, of the issued and outstanding shares of common stock of the Company (as of March 29, 2018) as a result of the acquisition of TASC. Birch GP, LLC (“Birch GP”) is the general partner of Birch Partners, and the members of Birch GP are investment funds affiliated with KKR and GA.

In the discussion of the terms of the Stockholders Agreement below, the “stockholder party” means Birch Partners, and, following a distribution of any shares of our common stock, par value $0.01 per share, held by Birch Partners to the KKR investors and the GA investors. The “stockholder group” means Birch Partners, together with any affiliate of Birch Partners or a KKR investor or GA investor who becomes a “stockholder” within the meaning of the Stockholders Agreement, in each case that beneficially owns any of the Company’s common stock and has become a party to the Stockholders Agreement. In this item discussion, “independent directors” means the directors of the Company who are not nominees of the stockholder party.

Board Representation. The Stockholders Agreement provides the stockholder party with four nominees, subject to the following:

 

•

For so long as each of the GA investors and the KKR investors, as applicable, beneficially own at least 50% of the shares of the Company’s common stock it beneficially owned on February 26, 2015, the stockholder party will have the right to nominate four of the Board members.

 

•

For so long as each of the GA investors and the KKR investors, as applicable, beneficially own less than 50% but at least 25% of the shares of the Company’s common stock it owned on February 26, 2015, the stockholder party will have a right to nominate two of the Board members.

 

•

Upon the first date that the GA investors or the KKR investors, as applicable, beneficially own less than 50%, but at least 25%, of the shares of the Company’s common stock they beneficially owned on February 26, 2015, one of the Company’s board members nominated on behalf of the GA investors or the KKR investors, as applicable, must resign from the Board.

 

•

Upon the first date that the GA investors or the KKR investors, as applicable, beneficially own less than 25% of the shares of the Company’s common stock they beneficially owned on February 26, 2015, the remaining Board members nominated on behalf of the GA investors or the KKR investors, as applicable, must resign from the Board.

 

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Pursuant to the Stockholders Agreement, the Company will include the stockholder party nominees in the slate of nominees recommended by the Company’s Board for election of directors and will use its reasonable best efforts to cause the stockholders of the Company to elect the stockholder party nominees. In the event any of the Board members nominated by the stockholder party (a “Stockholder Party Director”) resigns or is unable to serve, the stockholder parties will be entitled to appoint a replacement Stockholder Party Director.

Pursuant to the Stockholder’s Agreement, until February 26, 2017, the Board was obligated to maintain a co-chair structure with one Stockholder Party Director co-chair and one co-chair elected by a majority of the independent directors. The Board eliminated the co-Chair structure in February 2018, in connection with Ms. Dugle’s appointment as Chairman.

In addition, so long as there are two or more Stockholder Party Directors, one Stockholder Party Director will serve on each committee of the Company’s Board (other than a committee that is to be composed solely of independent directors or a committee established to address conflicts with the stockholder group or the KKR investors or the GA investors). So long as there is at least one Stockholder Party Director serving on the Company’s Board, one Stockholder Party Director will serve on the Compensation Committee. No Stockholder Party Director will serve on any committee if it would violate mandatory legal or listing requirements concerning that director’s independence, but the Company will take all reasonable efforts to avoid any such disqualification.

Voting. So long as the stockholder party has director nomination rights under the Stockholders Agreement, with respect to any proposal or resolution relating to the election of directors, it will vote or cause to be voted all of its voting securities in the same manner as, and in the same proportion to, all shares voted by holders of voting securities (except that with respect to the Stockholder Party Director nominees, the stockholder party may vote all of its voting securities in favor of the Stockholder Party Director nominees). For purposes of the Stockholders Agreement, “voting securities” means the Company’s common stock and shares of any other class of capital stock or interests in any other equity securities of the Company then entitled to vote generally in the election of directors.

In the case of all other proposals or resolutions that require a stockholder vote, the stockholder party will vote or cause to be voted all of its excess voting power (defined as the aggregate percentage of voting power represented by the stockholder group’s voting securities out of the total voting power of all the Company’s common stock, less 30%) in the same manner as, and in the same proportion to, all shares voted by holders of voting securities, excluding the votes or actions of the stockholder group with respect to its voting securities representing 30% of the total voting power of all the Company’s common stock.

Standstill Restrictions. The Stockholders Agreement contains certain standstill provisions generally restricting the stockholder group, certain of the KKR investors and certain of the GA investors and certain of their respective affiliates from February 26, 2015, until, with respect to any party, six months after such party no longer has any rights to nominate or designate nominees to the Company’s board.

Change of Control. Without the approval of a majority of the independent directors, no member of the stockholder group, the KKR investors or the GA investors may enter into or affirmatively support any transaction resulting in a change of control of the Company in which any member of the stockholder group receives per share consideration in its capacity as a holder of the Company’s common stock in excess of that to be received by other holders of the Company’s common stock.

 

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Transfer Restrictions. The stockholder group, the KKR investors and the GA investors will be subject to certain transfer restrictions related to the Company’s common stock for a period beginning on February 26, 2015, and ending on the earlier of February 27, 2021, and the day following the date on which the Company undergoes an ownership change (as defined in Section 382(g) of the Code) (an “Ownership Change”), including the following:

 

•

No member of the stockholder group may sell or transfer any shares of the Company’s common stock directly held by such member.

 

•

No KKR investor or GA investor may permit the sale or transfer of an equity interest in a KKR investor or a GA investor by any person who holds any direct or indirect equity interest in any of the KKR investors or GA investors, respectively (which we refer to as a partner) (other than pursuant to a redemption of such an equity interest in a KKR investor or a GA investor), that would result in an “owner shift” under Section 382(g) of the Code (an “Owner Shift”).

 

•

No KKR investor or GA investor may permit any transfer of the limited partnership interests of Birch Partners directly held by any limited partner of Birch Partners other than the KKR investors or the GA investors (each such limited partner a “Co-investor Partner”).

 

•

No member of the stockholder group nor any KKR investor or GA investor may otherwise effect any transaction that would result in a direct or indirect transfer of shares of the Company’s common stock (including pursuant to a redemption of an equity interest in a KKR investor or a GA investor) unless a committee of the Company’s Board composed solely of independent directors (the “Committee”) provides a written determination that such transaction would not result in an Owner Shift.

 

•

Notwithstanding the restrictions discussed above, for the period beginning on February 27, 2018, and ending on the earlier of February 27, 2021, and the date on which the Company undergoes an Ownership Change, the Stockholders Agreement permits the KKR investors and GA investors and any partner or co-investor partner to effect an indirect or direct sale or transfer of up to an aggregate of 16,481,516 shares of the Company’s common stock, as adjusted for any stock split, reverse stock split or similar transaction (the “Waived Transfer Amount”). Certain sales or transfers will not count toward or reduce the Waived Transfer Amount, including:

 

•

Any direct or indirect sale or transfer of an equity interest in a KKR investor or a GA investor by a partner (other than pursuant to a redemption of a partner’s equity in a KKR investor or a GA investor) that does not result in an Owner Shift;

 

•

Any other direct or indirect sale or transfer by any member of the stockholder group, the KKR investors or the GA investors or a redemption of a partner’s equity interest in a KKR investor or a GA investor that, in accordance with a written determination of the Committee, does not result in an Owner Shift; and

 

•

A distribution by the stockholder group of any the Company’s common stock held by Birch Partners to a co-investor partner if, both (a) the Committee provides a written determination that such distribution would not result in an Owner Shift and (b) either (i) the Committee makes a written determination that the sale or transfer of such the Company common stock directly held by the co-investor partner after such distribution does not result in an Owner Shift or (ii) the co-investor partner represents and undertakes to the Company that it will not directly sell or transfer any the Company common stock received in such distribution, other than in a distribution to its equity holders.

Notwithstanding the restrictions described above, beginning on the earlier of (i) February 27, 2021, and (ii) the day following the date on which the Company undergoes an Ownership Change, the stockholder group, the KKR investors, the GA investors, the partners and the co-investor partners may, subject to the restrictions described in the immediately following paragraph, directly or indirectly sell or transfer any of the shares of the Company’s common stock held directly or indirectly by them regardless of whether such sale or transfer results in an Owner Shift.

 

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In addition to and notwithstanding the restrictions described above, no member of the stockholder group may, individually or in the aggregate, other than in connection with a registered public offering, including any underwritten offering or a change of control transaction affecting the Company, which change of control transaction is approved by the Board, knowingly transfer shares of the Company’s common stock to a person (other than to any permitted transferee, as defined in the Stockholders Agreement) who, after such acquisition, would hold in excess of 5% of the outstanding shares of the Company’s common stock.

The persons in the stockholder group are, with respect to the shares of the Company’s common stock they hold (“registrable shares”), entitled to certain registration rights beginning February 26, 2018, including (i) the right to request that the Company file an automatic shelf registration statement and effect unlimited underwritten offerings pursuant to such shelf registration statement; (ii) up to eight demand registration rights in the event that the Company is no longer eligible to use or otherwise ceases to maintain an effective shelf registration statement; and (iii) unlimited piggyback registration rights that allow holders of registrable shares to require that shares of the Company’s common stock owned by such holders be included in certain registration statements filed by the Company, in each case subject to the transfer restrictions contained in the Stockholders Agreement. In connection with these registration rights, the Company has agreed to effect certain procedural actions, including taking certain actions to properly effect any registration statement or offering and to keep the participating stockholder parties reasonably informed with adequate opportunity to comment and review, as well as customary indemnification and contribution agreements.

Termination. The Stockholders Agreement will terminate by consent of all parties or when the stockholder group no longer beneficially owns any shares of the Company’s common stock. Certain sections of the Stockholders Agreement, including those relating to indemnification, will survive such termination, and the provisions relating to registration rights will survive termination of the Stockholders Agreement until the first date on which there are no registrable shares outstanding.

 

Other Relationships

Certain investment funds affiliated with KKR hold limited partner interests in Birch Partners, LP and membership interests in Birch GP, LLC, the general partner of Birch Partners, LP, the holder of approximately 50.9% of our outstanding common stock as of March 29, 2018. Further, David M. Kerko, a Director on our Board since February 26, 2015, is a former executive of KKR.

Certain banking institutions (including affiliates of KKR) are also lenders under our existing credit facilities consisting of (i) a senior secured term B1 loan facility in the original principal amount of $200 million (“Term B1 Loan”), (ii) a senior secured term B2 loan facility in the original principal amount of $680 million (“Term B2 Loan”) and (iii) a senior secured revolving credit facility in the original amount of $165 million (“Revolver” and, together with the Term B1 Loan and the Term B2 Loan, our “Existing Credit Facilities”), which we entered into in August 2016 to refinance the TASC Credit Facilities (the “Refinancing”) and amended in February and August 2017. As of March 31, 2018, the interest rates on our Term B1 Loan, Term B2 Loan and Revolver were approximately 4.13%, 4.63% and 8.50%, respectively. An affiliate of KKR received approximately $500,000 in total fees under our Existing Credit Facilities during 2017.

After repayment in full of our commitment to provide a promissory note of $585 million (the “Bridge Loan Commitment”) in connection with the closing of the acquisition of TASC and the Refinancing, as of March 31, 2017, we, through the Existing Credit Facilities, had $190.0 million outstanding under our Term B1 Loan, $601.0 million outstanding under our Term B2 Loan, and no outstanding amounts under our Revolver. The amount of principal and interest paid from the closing of the acquisition of TASC to March 31, 2017 was approximately $389.1 million.

Certain banking institutions (including affiliates of KKR) were commitment parties under the Bridge Loan Commitment which was used, among other things, to: (1) repay outstanding indebtedness under our existing

 

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credit facilities; (2) following such repayment but prior to the consummation of the acquisition of TASC, provide funds for the payment of the special cash dividend in connection with the acquisition of TASC; and (3) pay transaction fees and expenses and for general corporate purposes.

Certain banking institutions (including affiliates of KKR) were also party to the Second Amended and Restated First Lien Joinder Agreement, dated December 23, 2014, to TASC’s existing First Lien Credit Agreement, dated as of May 23, 2014 and the Second Amended and Restated Second Lien Joinder Agreement, dated January 26, 2015, to TASC’s existing Second Lien Credit Agreement, dated as of May 23, 2014, pursuant to which KKR (among other entities) agreed to provide debt facilities consisting of (i) new senior secured first lien incremental term loans in an aggregate amount of $435.0 million (the “Incremental First Lien Term Facility”), (ii) additional senior secured first lien revolving commitments in an aggregate amount of $65.0 million (the “Incremental First Lien Revolving Facility”) and (iii) new senior secured second lien incremental term loans in an aggregate amount of $150.0 million (together with the Incremental First Lien Term Facility and the Incremental First Lien Revolving Facility, the “Incremental Debt Facilities”). The Incremental Debt Facilities were implemented in connection with the closing of the acquisition of TASC and used to repay the outstanding indebtedness of the Bridge Loan Commitment.

Certain banking institutions (including at certain points affiliates of KKR) were also lenders under TASC’s credit facilities consisting of (i) a $395 million first lien term loan facility (the “First Lien Term Facility”), (ii) a $50 million revolving credit facility, with a $12.5 million letter of credit sublimit and a $15 million swing line loan sublimit (the “First Lien Revolving Facility”) and (iii) a $250 million second lien term loan facility (together with the First Lien Term Facility and the First Lien Revolving Facility, the “Refinanced Credit Facilities”). The Refinanced Credit Facilities together with the Incremental Debt Facilities are referred to as the “TASC Credit Facilities”.

 

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EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis			25
Executive Summary			26
2017 Business Highlights			26
Compensation Overview			26
What We Pay and Why: Elements of Total Direct Compensation			28
TDC Element One: Base Salary			28
TDC Element Two: Annual Incentive Awards			29
TDC Element Three: Long-Term Incentive Awards			32
Executive Benefits and Perquisites			34
Compensation Decision-Making Process			35
Key Participants; Roles and Responsibilities			35
Use of Market Data and Competitive Compensation Positioning			35
Additional Information			36
Executive Stock Ownership Guidelines			36
Trading Controls and Prohibition on Speculative Transactions			37
Timing of Equity Grants			37
Executive Compensation Recovery Policy			37
Tax Considerations			37
CEO Pay Ratio			37
Compensation Committee Report			38
Tabular Executive Compensation Disclosure			39

 

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) is a review of the 2017 compensation programs provided for our named executive officers (“NEOs”), including the factors considered and decisions made by the Compensation Committee (the “Committee”). Engility’s NEOs for 2017 were:

 

•

Lynn A. Dugle, President and Chief Executive Officer

 

•

Wayne M. Rehberger, Senior Vice President and Chief Financial Officer

 

•

Thomas O. Miiller, Senior Vice President, General Counsel and Corporate Secretary

 

•

Susan M. Balaguer, Senior Vice President and Chief Human Resources Officer

 

•

John P. Hynes, former President and Chief Operating Officer (who ceased to serve as an executive officer of the Company as of June 20, 2017)

For purposes of this CD&A, the narrative as well as the tables, charts and other graphics below will focus on our four executive officers as of December 31, 2017. Mr. Hynes is excluded from the narrative as he ceased to be an employee of our Company in June 2017.

 

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Executive Summary

2017 Business Highlights

2017 was a successful year for Engility. The Company continued to deliver strong cash flow and profitability results, excluding one-time non-cash charges. The Company also effectively executed on its strategy and made significant progress to further strengthen its business and balance sheet.

 

		2017 Business Highlights
Ms. Dugle continued to successfully execute against the Company’s three primary objectives: Drive Sustainable Organic Growth; Attract, Grow and Retain Talent; and Strengthen the Balance Sheet. The Company made notable progress towards all three objectives as reflected in its achievements listed here.
		Book-to-bill ratio on a trailing twelve month basis of 1.0x or above for six consecutive quarters
		$1.93 billion revenue
		$98 million cash flow from operations
		58 days sales outstanding at December 31, 2017
		$110 million in debt payments in 2017
		More than $10 million of annualized interest savings from two debt re-pricings
		Divested a non-core business, International Resources Group Ltd., in January 2017
		Hired a successful senior executive to lead our Defense business and recruited two new Board members
		Expanded our presence in targeted, strategic markets

Compensation Overview

The Committee, working with its independent consultant, FW Cook, and management, oversees our executive compensation process. For each NEO position, FW Cook prepares benchmark compensation data derived from proxy data disclosed by our Total Compensation Peer Group, as well as general industry survey data. The benchmark data is used to define the median compensation for each executive position. We pay our executives within a competitive band around the respective medians to ensure that we are competitive in attracting, retaining and motivating our senior leadership, but do not overpay.

Management designs the short- and long-term incentive compensation plans so that such plans promote achievement of the Company’s strategic objectives. Financial goals in the incentive plans are based on the Company’s annual operating plan (“AOP”) approved by the Board of Directors. The plan designs, including financial targets, are reviewed and approved by the Committee, with support from FW Cook.

Consideration of 2017 “Say-on-Pay” Advisory Vote

The Company conducts a stockholder “say-on-pay” advisory vote regarding executive compensation at each annual stockholder meeting. In 2017, our stockholders overwhelmingly approved of our executives’ compensation with 96.8% voting in favor. The Committee then evaluated these results. The Committee made no changes to our executive compensation program and policies as a result of the 2017 vote.

 

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Compensation Philosophy

Engility’s compensation program is designed to align executive and stockholder interests, provide rewards commensurate with Company performance and attract, retain and motivate highly qualified executives. Payment for performance is the guiding principle. This means, more specifically, payment for delivering financial results that benefit our stockholders. By adhering to this principle, our program ensures that the compensation paid to our NEOs and other senior leaders is aligned with our stockholders’ interests.

We believe that above-market pay is appropriate for superior performance and below-market pay is appropriate for underperformance. For this reason, more than 60% of each NEO’s target total direct compensation (i.e., salary, annual incentive and long-term incentive) is performance-based. The 2017 annual cash incentive is 100% performance-based and 60% of the equity granted under our long-term incentive plan is performance-based to emphasize stockholder returns and long-term performance. Each NEO’s compensation is based on the officer’s role, responsibilities, performance and experience.

The designs of our incentive plans use financial metrics that provide an inherent check and balance relative to each other. In general, the plan metrics establish complementary goals for profit, growth and cash flow. This holistic design promotes a balanced performance approach, reducing the risk of management maximizing any single aspect of financial performance for personal gain. The overall objective is profitable revenue growth with healthy cash flow that reduces debt and drives the share price.

Executive Compensation Practices

Below are executive compensation practices that we use to drive performance. We also list practices we exclude because they do not serve our stockholders’ long-term interests.

 

What We Do
		Pay for Performance — For 2017, more than 60% of our target total direct compensation for our NEOs was composed of variable performance-based compensation.
		Reasonable Severance/Change in Control Provisions — We amended our severance and change-in-control plans in 2017 to align them with peer and industry practices. Beginning in 2016, we included double trigger acceleration provisions in all new equity grants.
		Modest Perquisites — We provide modest perquisites, consisting of executive health benefits, life insurance and tax and financial planning.
		Stock Ownership and Retention Guidelines — Our stock ownership guidelines for executive officers are designed to align their long-term interests with those of our stockholders. Additionally, our non-executive directors must retain their vested Engility equity until the earlier of their resignation or a change in control.
		Regular Review of Share Utilization — We evaluate share utilization by reviewing overhang levels and burn rates (i.e., the dilutive impact of equity compensation) prior to approving our annual compensation program.
		Independent Compensation Consulting Firm — The Committee uses an independent compensation consulting firm that provides no other services to the Company.
		Mitigate Undue Risk in Compensation Programs — We mitigate undue compensation risks by using caps on performance payments, a clawback policy and stock ownership guidelines for our executive officers, as well as processes to identify risk. The incentive plans feature performance targets chosen to incentivize balanced annual and long-term performance.

 

What We Don’t Do
		No employment contracts for our executive officers(1)
		No excise tax gross-ups on perquisites or severance benefits upon a change in control
		No hedging transactions or short sales by executive officers or directors
		No pension or supplemental company contributions to executive retirement benefit plans
(1)  Mr. Rehberger is a party to a legacy employment agreement with TASC that was assumed and remains in effect following the Company’s acquisition of TASC.

 

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Risk Considerations

The Committee, supported by FW Cook, assessed our compensation program to determine whether associated risks were likely to have a material adverse effect on the Company. The Committee found that the program design, including features such as payout caps, a clawback policy and stock ownership guidelines for our executive officers, reduced the likelihood of excessive risk-taking without undermining the program’s purpose and did not encourage risk-taking that could have a material adverse effect.

What We Pay and Why: Elements of Total Direct Compensation

Our annual target total direct compensation (“TDC”) is composed of three elements: base salary, annual cash incentive compensation and long-term equity grants, discussed in the following sections.

The proper relative weight for each element helps to instill a pay-for-performance culture and align executive compensation with stockholder interests. For example, greater weight on variable performance-based compensation (e.g., annual bonus) helps motivate executives to drive shareholder value through Company achievements. Similarly, long-term compensation helps mitigate short-term risk taking. For our CEO, 80% of her 2017 target TDC was either performance-based or long-term incentive compensation. Similarly, 65% of target TDC for the other NEOs was performance-based or long-term incentive compensation.*

 

 

* Pay mix for the Other NEOs reflects the average TDC mix for Messrs. Rehberger and Miiller, and Ms. Balaguer.

 

 

2017 TARGET TOTAL DIRECT COMPENSATION (ANNUALIZED)*
Executive		Base Salary ($000)		Target Annual Cash Bonus ($000) / (% of Base)		Target Long-Term Equity Award ($000) / (% of Base)		Total Target Direct Compensation ($000)
Lynn A. Dugle		900		1,100 / 122%		2,450 / 272%		4,450
Wayne M. Rehberger		450		450 / 100%		563 / 125%		1,463
Thomas O. Miiller		450		270 / 60%		450 / 100%		1,170
Susan M. Balaguer		340		204 / 60%		340 / 100%		884

TDC Element One: Base Salary

We pay base salaries to attract talented executives and provide a fixed level of cash compensation. The Committee generally sets NEO base salaries within a competitive range of market median. The base salaries for each NEO for 2017 are set forth below.

 

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Named Executive Officer		2017 Base Salary      ($000)		Percentage Increase      Over 2016 Base Salary
Lynn A. Dugle		900		0%
Wayne M. Rehberger		450		0%
Thomas O. Miiller		450		0%
Susan M. Balaguer		340		0%

TDC Element Two: Annual Incentive Awards

The 2017 annual incentive compensation plan (the “2017 AICP”)² is the basis for annual cash bonuses paid to Company leadership. Each participant was assigned a target bonus in the first quarter of 2017, based on a defined percentage of their base salary. As discussed in further detail below, in February 2018, the Committee approved the following 2017 cash bonuses payable to our NEOs:

 

Named Executive Officer		Target Bonus Opportunity      ($000)		Actual Bonus Earned      ($000)
Lynn A. Dugle(1)		1,100		461
Wayne M. Rehberger(2)		450		270
Thomas O. Miiller(3)		270		162
Susan M. Balaguer(4)		204		140
(1)  Upon Ms. Dugle’s request, the Committee elected not to increase Ms. Dugle’s 2017 cash bonus.   (2)  The Committee increased Mr. Rehberger’s 2017 cash bonus by $81,450 as a result of his personal performance.   (3)  The Committee increased Mr. Miiller’s 2017 cash bonus by $48,870 as a result of his personal performance.   (4)  The Committee increased Ms. Balaguer’s 2017 cash bonus by $54,524 as a result of her personal performance.

Discussion of AICP Payout Calculations

NEO payouts under the 2017 AICP were based on 1) a Financial Rating derived from the Company’s performance relative to pre-established metrics and target values and 2) subject to a Personal Performance Adjustment determined by the Committee and, with respect to the CEO, approved by the Board. The following graphic depicts the 2017 AICP design with metrics, target values and payout calculation.

 

 

2	The AICP is approved by our Committee pursuant to the Engility Holdings, Inc. Amended and Restated 2012 Cash Incentive Plan.

 

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The table below presents the rationale and target value for each metric target, as well as the performance of the Company relative to target values, and the corresponding financial rating for 2017.

 

2017 AICP Design – Personal Performance Adjustment

Our Board annually evaluates our CEO relative to pre-determined goals. This evaluation process is managed by the Nominating/Corporate Governance Committee of the Board (“Governance Committee”). The CEO submitted to the Governance Committee a self-assessment that addressed her overall leadership and performance. The Governance Committee (with support from Bass Berry & Sims PLC, our external corporate counsel) solicited input from each Director (excluding the CEO) and delivered an assessment of her performance to the Committee. The Committee then considered the CEO’s performance as it related to compensation and provided its compensation recommendations to the Board for approval.

Our CEO provided performance assessments and recommended compensation actions (including AICP payout adjustments) to the Committee for the other NEOs. The Committee considered the recommendations and adjusted NEO compensation as it deemed appropriate.

 

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In recommending or approving NEO payouts, the Committee considered the 2017 performance of each NEO, as described below.

 

2017 EXECUTIVE PERFORMANCE

Lynn A. Dugle, President, Chief Executive Officer and Chairman

In 2017, Ms. Dugle oversaw the restructuring of the Company into three optimized business units managed by seasoned successful business leaders. Accompanying this change was the continued upgrade of the Company’s leadership talent at the senior and mid-management level. Despite the disruption inherent in organizational and leadership change, the Company achieved overall financial success as it met guidance for profit (excluding one-time charges), cash flow and bookings. Specifically, the Company maintained a book-to-bill ratio of 1.0 or better for six consecutive quarters, paid down over $110 million in debt, and exceeded expectations on EBITDA margin. Further, the Company made significant progress by implementing a comprehensive strategic planning process and continuing to enhance its programs for employees.

Wayne M. Rehberger. Senior Vice President and Chief Financial Officer   Mr. Rehberger leads the finance, investor relations, IT, internal audit, and facilities functions of the Company. In early 2017, he led an initiative to re-price the Company’s term debt twice, resulting in annual interest savings of $8 million. He oversaw the successful implementation of the new ASC 606 revenue recognition standard. The IT department completed a Company-wide technology refresh and the facilities consolidation project yielded approximately $5 million in year-over-year savings.

Thomas O. Miiller. Senior Vice President, General Counsel and Corporate Secretary   Under Mr. Miiller’s supervision, the Company met all compliance obligations and successfully closed the sale of a non-core business unit. Mr. Miiller led initiatives to update the Company’s proxy filing, and the Company’s executive severance and change-in-control severance plans, improving the clarity of both plans and updating each to current market standards. In the management of litigation and disputes, the law department achieved successful outcomes that saved the Company over $11 million.

Susan M. Balaguer. Senior Vice President and Chief Human Resources Officer   Ms. Balaguer exceeded expectations for herself and the Human Resources (HR) organization in 2017. As the result of a strategic re-structuring of the Human Resources organization and enhancement its leadership, the HR department successfully implemented a host of programs that improved support for the Company’s employees and its business. These programs and improvements directly supported the Company’s strategic objective of attracting, growing and retaining talent. The results of Ms. Balaguer’s leadership were reflected in substantial reductions in both the time to fill openings and the voluntary attrition rates. In both metrics, Engility now exceeds industry benchmarks by a substantial margin.

TDC Element Three: Long-Term Incentive Awards

We provide long-term incentive (“LTI”) awards to our NEOs in the form of equity grants. Other participants are chosen based on their ability to influence Company results and their personal performance. The target annual LTI for each participant, and the participating group as a whole, takes into account the Company’s long-term business objectives, competitive market practices, equity usage and shareholder dilution.

 

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2017 LTIP Grants

Our 2017 LTI plan³ (“LTIP”) is composed of two equity-based awards: performance units (PUs) and time-based restricted stock units (RSUs). LTIP awards are 60% PUs and 40% RSUs and were awarded pursuant to the following plan design:

 

 

The total award value is based on a percentage of each participant’s base salary and calculated by dividing the award value by the closing EGL share price on the grant date. The following table sets forth the 2017 LTIP awards made to our NEOs.

 

Executive		Dollar Value of 2017      Performance Unit Awards      ($000)					Dollar Value of 2017     RSU Awards ($000)					Target Dollar Value of  2017 LTIP Grants ($000)
Lynn A. Dugle(1)				1,470					980					2,450
Wayne M. Rehberger				337					225					562
Thomas O. Miiller				270					180					450
Susan M. Balaguer				204					136					340

(1)  In accordance with the terms of Ms. Dugle’s February 29, 2016 offer letter, her LTIP equity grant agreements provide that upon her involuntary termination from the Company for other than cause or her resignation from the Company other than at a time when she is in material breach of her obligations, such grants will continue to vest under their original terms as though her employment continued through the vesting period. This provision, however, does not apply to equity grants made within the 6-month period prior to her termination.

 

 

³ The Committee approved the Engility Holdings, Inc. 2017 LTIP, an annual equity compensation plan pursuant to the Engility Holdings, Inc. Amended and Restated 2012 Long-Term Performance Plan (the “Equity Plan”). All equity awarded under the 2017 LTIP may be settled in Company stock or the cash equivalent at the Committee’s discretion.

 

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and all performance-based equity awards only vest following a qualifying termination after a change in control, as described further beginning on page 44 herein. Our CIC Severance Plan also includes a double trigger provision with respect to the cash awards and other benefits specified thereunder.

Mr. Rehberger is a party to a legacy employment agreement with TASC that was assumed by the Company in the TASC acquisition. In the event of an involuntary employment termination without “cause” or for “good reason” (each as defined in the employment agreements), Mr. Rehberger would be entitled to severance benefits equal to 1.5 times base salary and average annual bonus for the two preceding fiscal years, as well as a lump sum payment to cover 18 months of COBRA premiums for continued participation in the Company’s health and welfare plans. He would also receive a pro rata bonus for his service period during the year of termination.

For information on the amounts that would be payable under these plans and otherwise upon a change in control, see “Executive Compensation—Potential Payments Upon Change in Control or Termination of Employment” beginning on page 44 herein. There are no tax gross-ups on any of these severance benefits.

Compensation Decision-Making Process

Key Participants; Roles and Responsibilities

Role of the Compensation Committee

Our executive compensation program is administered by the Committee, which is ultimately responsible for the review and approval of compensation for our CEO and all Executive Officers that report directly to the CEO. Key areas of responsibility for the Committee are described in “Corporate Governance—Committees of the Board of Directors—Compensation Committee” on page 14 herein.

Role of Management and Our Chief Executive Officer

Management provides the Committee with data, analysis and suggested plan designs to ensure that Engility’s compensation program aligns with and supports the Company’s business objectives. Our CEO annually reviews the NEOs’ performance and recommends salary adjustments, annual incentive award targets and long-term incentive award values. Our CEO has no role in her compensation.

Role of the Compensation Consultant

The Committee selects and compensates an independent consultant to advise it on matters concerning executive and director compensation. Since 2012, the Committee has retained FW Cook as its independent compensation consultant. To maintain its independence, FW Cook performs no other services for the Company. In February 2017, the Committee formally assessed FW Cook’s independence and concluded that there was no other relationship that raised a conflict of interest or impaired FW Cook’s independence.

Use of Market Data and Competitive Compensation Positioning

Setting Median Compensation Benchmarks

The Committee uses data collected from the annual proxy statements of our Total Compensation Peer Group (see below) as well as industry surveys (collectively, “market data”) to define an approximate base salary median for each NEO position. The Committee regards compensation within 15% above or below median as competitive. The Committee also looks to set target TDC within 15% of the medians established by market data for each NEO position. Market data benchmarks, however, may not always account for our NEOs’ specific responsibilities and, thus, may fail to accurately assess the competitiveness of the compensation. Accordingly, our NEOs may be compensated below or above benchmark levels based on other considerations, including whether they perform duties beyond those typical for their position.

 

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Total Compensation Peer Group

For 2017, we used the below comparator group of peer companies as a key input when making compensation decisions.

 

2017 Total Compensation Peer Group
AAR Corporation		Cubic Corporation		MAXIMUS Inc.
Booz Allen Hamilton Holding Corp.		Harris Corporation		Science Applications International Corporation
CACI International Inc.		ICF International, Inc.		Tetra Tech, Inc.
CAE Inc.		Leidos Holdings, Inc.		Unisys Corporation
CSRA Inc.		ManTech International Corp.		Vectrus, Inc.

Specifically, our peer group was used:

 

•

To assess the competitiveness of total direct compensation awarded to senior executives;

 

•

To evaluate share utilization by reviewing overhang levels and annual run rate;

 

•

To benchmark the form and mix of incentive compensation awarded to employees;

 

•

To benchmark share ownership guidelines;

 

•

To examine whether executive compensation programs are aligned with competitive market practices and Company performance; and

 

•

As an input in designing compensation plans, benefits and perquisite programs.

Additional Information

Executive Stock Ownership Guidelines

We use the following stock ownership guidelines for executives, including our NEOs, to align executives’ long-term financial interests with those of our stockholders.

 

Executive		Value of Common Stock To Be  Owned
Chief Executive Officer		6 times base salary
Senior Vice Presidents and above (other than the CEO)		3 times base salary

Shares that count towards compliance with the guidelines include:

 

•

Shares owned individually by the executive or jointly by the executive and his or her spouse;

 

•

Shares held in a trust established by the executive for the benefit of the executive or his or her family members;

 

•

Shares of equity-based instruments (excluding stock options) that vest solely based on time;

 

•

Shares of vested deferred stock units; and

 

•

Shares held in the Engility 401(k) plan account.

Until they satisfy their applicable ownership guideline, executive officers are required to retain 50% of their vested net shares (after settlement of taxes) acquired pursuant to the Company’s LTIP.

 

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In determining the pay ratio information provided above, we first identified our median employee for the 2017 fiscal year by using the following methodology, assumptions, adjustments and estimates, as permitted by Item 402(u) of Regulation S-K:

 

•

We selected December 31, 2017 as the date upon which we would identify our median employee, and, from our tax and payroll records, we compiled a list of all full-time, part-time, and temporary employees who were employed on that date, including employees working both within and outside of the U.S.

 

•

We excluded from the list approximately 1,200 inactive and temporary employees who are not part of the regular workforce.

 

•

We used total compensation during the 2017 fiscal year as a consistently applied compensation measure to identify our median employee from the remaining employees on the list. For this purpose, we define total compensation as the sum of annualized base wages and annual incentives payable in cash during the fiscal year, plus stock incentive awards during the year.

Once our median employee was identified in the manner described above, the $95,000 annual total compensation of our median employee was determined in accordance with methodology we used to determine the annual total compensation of our named executive officers, as reported in the “2017 Summary Compensation Table”.

It should be noted that the pay ratio disclosure rules of Item 402(u) of Regulation S-K provide reporting companies with a great deal of flexibility in determining the methodology used to identify the median employee, to calculate the median employee’s annual total compensation and to estimate the ratio of the annual total compensation of the CEO to the median of the annual total compensation of all other employees. As such, our methodology may differ materially from the methodology used by other companies to prepare their pay ratio disclosures, which may contribute to a lack of comparability between our pay ratio and the pay ratio reported by other companies, including those within our industry.

 

Compensation Committee Report

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Engility Holdings, Inc.

Compensation Committee

Steven A. Denning (Chairman)

William G. Tobin

David A. Savner

Peter A. Marino

The foregoing Report of the Compensation Committee shall not be deemed “filed” for any purpose, including for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section. The Report of the Compensation Committee shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (the “Securities Act”), or under the Exchange Act, regardless of any general incorporation language in such filing.

 

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Tabular Executive Compensation Disclosure

2017 Summary Compensation Table			39
2017 Grant of Plan-Based Awards			41
Outstanding Equity Awards at 2017 Fiscal Year-End			42
2017 Option Exercises and Stock Vested			44
Potential Payments Upon Change in Control/Employment Termination			45

 

2017 Summary Compensation Table

The following table provides summary information concerning compensation paid or accrued by us to our NEOs in 2017.

 

Name and Principal Position		Year				Salary  ($)				Bonus  ($)				Stock  Awards(1)  ($)				Non-Equity Incentive Plan Compensation(2) ($)				All Other Compensation(3) ($)				Total     ($)
Current Executive Officers
Lynn A. Dugle(4) President and Chief Executive Officer			2017				900,000				–				2,449,998				461,045				99,539				3,910,582
			2016				692,308				425,000				3,349,985				740,000				79,520				5,286,813
Wayne M. Rehberger Senior Vice President and Chief Financial Officer			2017				450,000								562,489				270,000				33,954				1,316,443
			2016				450,000				–				731,087				400,000				32,591				1,613,678
			2015				456,923				–				1,378,274				596,250				15,336				2,446,783
Thomas O. Miiller Senior Vice President, General Counsel and Corporate Secretary			2017				450,002								450,022				162,000				105,161				1,167,185
			2016				450,002				–				584,879				250,000				188,809				1,473,690
			2015				439,425				–				558,273				357,752				740,773				2,096,223
Susan M. Balaguer(4) Senior Vice President and Chief Human Resources Officer			2017				340,000				–				340,004				140,000				25,013				845,017
			2016				222,308				–				440,018				140,000				15,779				818,105
Former Executive Officers
John P. Hynes, Jr.(5) Former President and Chief Operating Officer			2017				337,500				–				–				–				2,608,504				2,946,004
			2016				641,346				–				1,267,209				225,000				28,708				2,162,263
			2015				623,077				–				2,205,219				845,000				11,741				3,685,037
(1)  Represents the grant date fair value of RSUs calculated in accordance with FASB ASC Topic 718 and consistent with the estimated aggregate compensation cost to be recognized over the applicable vesting period. The Company grants RSUs under the Equity Plan. For a discussion of the general terms of our RSU grants, see “Executive Compensation—Compensation Discussion and Analysis—What We Pay and Why: Elements of Total Direct Compensation—TDC Element Three: Long-Term Incentive Awards” and “Executive Compensation—Potential Payments Upon Change in Control/ Employment Termination—Effect of Change in Control or Termination of Employment Upon Equity Awards.”          Amounts also include the grant date fair value of performance units granted in 2017 under the Equity Plan calculated in accordance with FASB ASC Topic 718 and consistent with the estimated aggregate compensation cost to be recognized over the performance period. With respect to performance units granted in 2017, assuming the highest level of performance conditions will be achieved, the value of the award at the grant date (i.e., maximum potential shares multiplied by the fair value per share on the date of grant) for each of our NEOs was as follows: Ms. Dugle: $2,940,010; Mr. Rehberger: $674,987; Mr. Miiller: $540,014; Ms. Balaguer: $407,981. For a general discussion of the terms of our performance unit awards, see “Executive Compensation—Compensation Discussion and Analysis—What We Pay and Why: Elements of Total Direct Compensation—TDC Element Three: Long-Term Incentive Awards—2017 LTIP Grants.”          Pursuant to the Company’s Equity Compensation Award Policy, the Committee typically approves the annual equity grants for the Company’s employees and executive officers at a February meeting of the Compensation Committee. For 2017, that meeting and the approvals occurred on February 8, 2017. For the purposes of this table the awards’ values are presented based on their fair market value on their respective grant dates.          The Company cautions that the amounts reported for these awards may not represent the amounts that the NEOs will actually realize from the awards. SEC rules require the Summary Compensation Table to include in each year’s amount the aggregate grant date fair value of stock awards granted during the year. As a result, whether, and to what extent, a NEO realizes value will depend on the Company’s performance and stock price, as well as that NEO’s continued employment. Additional information on all outstanding stock awards is reflected in the Outstanding Equity Awards at 2017 Fiscal Year-End table beginning on page 42 of this proxy statement.

 

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