Q4 Spending On the Rise, Again
On June 27, Deltek released a report titled “Preparing for a Record Breaking Q4 Spending Spree,” detailing a Government Fiscal Year (Q4) Federal spending forecast projected to outpace prior fiscal years. The increase, as explained by the report, is largely driven by the funding delays in the earlier portion of the current fiscal year. The pick-up in Q4 spending is a recent reality of the past five fiscal years, whereas ten years ago, Q1 and Q2 reflected the biggest spending periods. However, the persistent budgetary turmoil of the past half-decade, complete with numerous legislative impasses in Congress and a sequester in FY2013, have delayed spending and created a marked shift in spending towards the latter half of the government fiscal year. Another critical factor is the “use it or lose it” spending strategy at the agency level, as contracting officers aim to protect their valuable slice of Federal contracting dollars. Once again in FY14E, appropriations delays and continuing resolutions have heightened the importance of Q4 spending, this time to potentially record-breaking levels.
Based on Deltek’s FY2014E spending projection of $489.5 billion, it is expected that ~36% of the spending is set to be executed in Q4, the highest point in the last 10 years. Specifically, it can be expected that peak activity will take place in September, which over the past five years has accounted for an average of ~18% of total fiscal year spending (no other month accounts for more than 10%), underscoring agency priorities to spend appropriated funds before they are re-allocated. Other positive indicators, such as order solicitation, also point to an exceptional Q4; YTD solicitation activity is up ~57%, with 6,000 instances in each of April and May (well above the mid-3,000 mark hit in the same months in FY2013).
With respect to the M&A market, the expected uptick in Q4 may be paramount for sellers looking to achieve liquidity objectives. Across the contractor landscape, the slow trickle of government spending over the past couple years, coupled with procurement delays in the earlier part of this fiscal year has had a dampening effect on financial performance and cast uncertainty on current and future year projections. This lack of visibility for both potential buyers and sellers, and consequently, the increased level of scrutiny from buyers, continues to contribute to sluggish M&A activity. However, with an anticipated ramp-up in procurements and contract funding, sellers may have the opportunity to capture new work and strengthen backlogs, potentially mitigating buyer concerns and catalyzing increased M&A activity in the latter months of 2014 and early 2015.
Source: GovWin from Deltek: “Preparing for a Record Breaking Q4 Spending Spree”