Science Applications Int'l Corp (SAIC)

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5 things to watch from the latest round of government contractor earnings reports


Another earnings season for federal contractors is in the books and during calls with Wall Street analysts executives touched on everything from the federal budget picture to the tight labor market to portfolio shaping to the business impact of tensions with Saudi Arabia.
There were also some calls I couldn’t cover in real time, or threads worth additional pursuit. Here are five worth paying attention to in the weeks and months ahead:

1. Engility Holdings Inc. (NYSE: EGL) CEO Lynn Dugle said her Chantilly company and Reston-based Science Applications International Corp. (NYSE: SAIC) — which is acquiring Engility for $2.5 billion in stock — should have a new org chart, with leadership slots to be filled, hammered out in the next couple of weeks. The integration is going smoothly because both companies are run pretty similarly — same organizational structure, compatible financial, HR and other back-office systems.

“I don't think we will get caught up on people trying to adjust with a new operating model because we have the same one,” she said.
The deal is expected to close by the end of January.
Dugle also touched on how, more than scale, the deal needs to enhance the capabilities of both companies as customer missions grow more and more complex. If you figure that anywhere from 5 percent to 10 percent of government IT services work is currently done by machines, with the rest performed by humans that “dividing line” will need to shift looking a decade out, Dugle said. Machines will need to do more of the work for the U.S. to keep pace and address threats from adversaries that may have three times the number of people that we do.
“So the reason SAIC and Engility are talking about capacity and solutions is that we are going to have to bring more technology and service delivery,” she added, “and that could be AI, it could be just basic tools and automation. But we are going to have to hit that mix and our customers want a deep bench.”

2. ManTech International Corp. (NASDAQ: MANT) has made no secret of its desire to grow through M&A — even as it's constantly mentioned as a prized takeover target — and CEO Kevin Phillips revealed the Herndon company has looked at fewer potential deals this year than the last two years.

“I do think that there are fewer businesses that have been in the market, but some of the larger ones had been, which was taking the headlines,” he said. “That said, because we're fairly focused on what we're looking for in terms of opportunities, we've been aggressive on when we find the right opportunity, but have not been successful. I think it's just because of the overall pricing in the market.”

ManTech will continue to aggressively source deals, Phillips added, but only if pricing and timing work in its favor. The federal budget picture — even with a proposed defense cut in fiscal 2020 — remains favorable because of the areas of emphasis, such as cyber, in the national defense strategy.

3. While much of the buzz in federal contracting typically surrounds things like cyber, space and weapons systems and IT modernization, ICF International Inc. (NASDAQ: ICFI) is seeing a couple of domestic catalysts drive new business: the opioid crisis and disaster recovery work.

Sudhakar Kesavan, CEO of Fairfax-based ICF, told analysts the consulting and tech services company has won new contracts totaling $20 million at the Centers for Disease Control, work supported by opioid funding. ICF is tracking additional opportunities there for next year as it builds on work it does for its largest federal client, the Department of Health and Human Services.

Kesavan also said ICF has secured disaster recovery contracts this year from state and local government clients totaling almost $245 million and should serve as a springboard for future growth next year and beyond. Congress, meanwhile, has appropriated $35 billion under the Community Development Block Grant program to help Puerto Rico, Texas, Florida and the U.S. Virgin Islands respond to damage from storms.

4. Arlington-based CACI International Inc. (NYSE: CACI) continues to think big around its products business, which includes a drone-tracking system called SkyTracker.

COO John Mengucci said the requirements for these types of solutions are growing: Threats evolve and government customers need new capabilities delivered faster than ever before. CACI is focusing its product efforts on the electronic warfare, signals intelligence and cyber markets.

Expect to see the number of products, as well as the earnings and revenue from those products, grow over the next 18 months, he added. McLean-based Booz Allen Hamilton talked up a similar products narrative on its earnings call.

5. Next to ManTech, no company is mentioned to me more often as an acquisition target than KeyW Holding Corp. (NASDAQ: KEYW). The Hanover, Maryland-based company said Tuesday it exceeded its revenue, profitability and awards objectives during the third quarter and paid down $10 million in debt — milestones that could make it an even more attractive M&A target.
The company revised its 2018 revenue guidance upward to $500 million to $515 million and CEO Bill Weber said KeyW is “now a more focused, easy-to-understand business" concentrating on cyber, ISR — intelligence, surveillance and reconnaissance — and analytics.
Defense funding trends — not to mention budget certainty — combined with those three focus areas position the company well for growth in 2019, Weber added.
“The national security mission is not driven by red or blue,” he said. “While the outcome of the elections will certainly play a prominent role in the federal budget discussions next October, we are confident that the agencies and missions that KeyW serves will be funded to meet that demand.”
https://www.bizjournals.com/washington/news/2018/11/06/5-things-to-watch-from-the-latest-round-of.html?ana=yahoo&yptr=yahoo

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