As federal spending falters, there are growing signs that contractors providing a variety of support work to the government are increasingly hitting more stumbling blocks.
McLean-based Science Applications International Corp. reported dismal earnings for its most recent quarter, blaming some of its woes on government spending cuts and purchasing delays. Herndon-based Sotera Defense Solutions has reported falling profit and has breached a requirement for some of its financing, Standard & Poor’s said.
Contractors specializing in providing services to the government have been one of the early casualties of federal belt-tightening, according to a Center for Strategic and International Studies report issued last week.
The CSIS defense-industrial initiatives group’s new analysis of federal services spending for fiscal 2012 had little good news for contractors. Federal services contract obligations declined to $308 billion — from a 2009 peak of $356 billion.
Contract spending related to information and communications technology — a significant focus area for the region — peaked in 2011 and fell in 2012.
CSIS has traditionally avoided making predictions about future spending but said it expects additional reductions.
Even in 2013, “services contracts will decline measurably further,” said David J. Berteau of CSIS. “We seem unlikely to return to past peaks.”
Some of the larger weapons manufacturers, including Lockheed Martin, have been able to weather defense cuts without major losses by shedding jobs and reprioritizing work. But many contractors who focus on services appear to be having a more difficult time.
At SAIC, profit and sales have dropped sharply. For the three-month period ended Aug. 2, the contractor said its profit fell to $42 million (12 cents a share), a nearly 62 percent decline from the same quarter a year ago. Revenue fell about 12.5 percent, to $2.47 billion.
The company cut its financial estimates for all of fiscal 2014.
“I think that if there’s one word to describe the situation we’re in right now, it’s confused,” SAIC chief executive John P. Jumper said in a call with analysts last week. “The spending patterns are erratic. I think there’s great caution among the contracting officers out there that we do business with day in and day out.”
SAIC’s results suggest that the road for contractors might be rockier than some have expected, said George A. Price Jr., senior equity research analyst for aerospace, defense and government services at BB&T Capital Markets.
“Here’s a large, broadly exposed company saying that things are a little bit worse than they expected,” he said. “That’s a cautious data point.”
Perhaps even more concerning, said analysts, were the disappointing results in the company’s health group. SAIC, like many other contractors, has promised to move into new markets to offset the decline in defense spending.
Profit in the company’s health and engineering group fell to $4 million for the quarter, down from $34 million during the same period the previous year.
“The growth engine for SAIC was going to be . . . that commercial health” unit, said Michael J. Smith, managing director of the Silverline Group, a consulting firm. “Now what you have is investors starting to question the growth of that business.”
At the same time, Standard & Poor’s reported that Sotera violated a debt agreement, and it wrote that the company’s profitability has come down markedly. The company said in a statement that it is working with its lenders. The company said Monday that Ares has "made an investment in Sotera bringing us back into compliance with our lending covenants."