Government Services Earnings Release

Over the past few weeks, several Government Service companies released quarterly earnings.  Common themes included declining revenue offset by flat or stronger margins, the need to establish two budget scenarios for FY2014 and FY2015 due to ongoing pricing pressures and continued uncertainty around the impact of sequestration, and mention of the monetary effects of the government shutdown during October.

For the third quarter, CACI reported a year-over-year revenue decline of 7.2%, driven primarily by an expected drawdown in Southwest Asia activities and budget-related reductions.  The company reiterated full-year guidance of $3.5 – 3.7 billion, excluding the acquisition of Six 3 Systems, but including estimated losses from the government shutdown of $10 million in revenue and $4 million in operating income.  Finally, CACI anticipates that roughly 84% of FY2014 revenue will derive from existing business, of which, 80% is funded.

Booz Allen Hamilton reported record margins that helped drive EPS ~26% above consensus estimates.  Fiscal year second quarter revenue was flat at $1.38 billion compared to the same period in the prior year; however, adjusted net income increased to $70.1 million from $55.7 million in the prior year period.  Adjusted EBITDA increased 24.2% to $153.8 million, and adjusted diluted EPS increased by $0.08 to $0.47 per share.  The company announced a $1 special dividend, its third in the past 18 months, as well as a regular dividend of $0.10.  Booz anticipates that the impact of the government shutdown will be roughly a $30 million reduction to third quarter revenue.  Related to the Federal debt ceiling, the company borrowed $250 million due to concerns of significant disruptions to the banking sector if the U.S. defaulted on its debt obligations, a decision that potentially reflected the company’s lack of confidence in the U.S.’s ability to come to a budgetary agreement.

ManTech announced weaker revenue and margins, resulting in third quarter EPS missing consensus estimates by almost 15%.  Management attributed reduced full year guidance to the government shutdown, a continued slowdown in contract awards, and the overturn of a previously awarded $180 million S3 contract (the 2-year $180 million award supporting OCO requirements in Afghanistan was re-awarded to the incumbent after their successful protest).  The company estimates that the shutdown caused a loss of $15 million in revenue and $2.5 million of operating income.  ManTech’s management reaffirmed that M&A is still the “primary use” of cash, noting the debt ceiling debate in Congress caused the company to be reluctant to aggressively acquire.  Furthermore, CEO George Pedersen noted the company’s appetite for acquisitions could be “quite large.”

Overall, shares of government services companies have rebounded from historic lows about twelve months ago.  Despite positive returns and mixed earnings, government service provides are expected to continue facing margin pressures, forcing them to find even more cost cutting initiatives.  Furthermore, some service providers such as ICF are hedging stymied Federal sector growth by targeting commercial and international markets.  For instance, the company noted that international government revenue increased ~34% over the same quarter last year.