Strong Balance Sheets Encourage M&A
While the government contracting market may have pulled-back from a spending and overall contracting perspective, Government Services and A/D contractors find themselves with very strong balance sheets. The combination of organic growth pressures and high levels of cash have and are expected to continue to whet acquisition appetites.
Median Net Debt / LTM EBITDA
Given historical growth and flat to declining NWC and CAPEX requirements, industry firms are in an enviable position from a cash perspective. There was approximately $28 billion of available cash and cash equivalents amongst the public Government Services and A/D contractors at June 30, 2010. Strong cash flow, combined with generally multi-year contracts contribute to the attractiveness of government contracting to the capital markets.
As shown in the graph to the right, net debt1 to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples for Government Services and A/D have declined substantially since 2008 following increases in the 2007 / 2008 time frame. Net debt for Government Services firms has decreased as a percentage of total revenues from greater than 10.3% in 2007 to 4.2% in 2010.
So where did the cash go? A significant value went to M&A and stock-buybacks. Since 2Q2007, there have been nearly 315 acquisitions of government services businesses by the Government Services and A/D firms. There has also been nearly $29 billion in aggregate stock buybacks by these companies over this period. In summary, the Government Services and Defense firms have invested the cash to either improve their strategic positioning via M&A or enhance earnings per share and share price through buybacks.
1 Generally defined as total interest bearing debt less cash and cash equivalents