Washington area contractors plan for sequestration delay

November 4, 2012

As mandatory federal spending cuts of nearly $1 trillion loom larger, many Washington area government contractors are making bets the cuts will be delayed, and they are holding back on lowering their financial guidance to Wall Street.

With limited information from the government about how the spending reduction known as sequestration would be implemented, contractors say they are sticking with their current projections for next year.

They do not have to look far for justification. In a debate last month, President Obama said that sequestration “will not happen,” while members of Congress on both sides of the aisle have called for alternatives.

Contractors are “all pretty adamant that there’s going to be some type of deferral . . . so that sequestration doesn’t happen Jan. 2,” said William Loomis, managing director at Stifel Nicolaus, which has relationships with many contractors.

Although McLean-based Booz Allen Hamilton would not take an official stance on whether sequestration would happen, Samuel R. Strickland, the contractor’s chief financial officer, said last week he expects it to be pushed off until April.

“Even knowing that would give us a fair amount more insight into what our [fiscal 2014] is going to look like than we have right now,” he said during a call with investors. “What’s creating a problem for us now is the uncertainty in the market.”

As companies wait for more information, there are signs of weakening.

Booz Allen last week reported profit of $46.1 million (27 cents per share) for the three-month period ended Sept. 30, down nearly 39 percent from $75.3 million (53 cents) in the same period a year earlier. Quarterly revenue slipped nearly 3 percent to $1.39 billion.

Arlington-based contractor CACI International saw its profits for the period sink to $35.7 million ($1.49 per share), a 15 percent drop from the $42.1 million ($1.41) it reported for the same period a year ago. Revenue stayed roughly stable at $931.2 million.

Concerns about shrinking revenue and profits are superseding worries about sequestration, said George A. Price Jr., senior equity research analyst for information technology services at BB&T Capital Markets, which has relationships with a number of contractors, including Booz Allen, CACI and ManTech International.

“Everyone is probably what if-ing a little bit behind the scenes [but] . . . there’s probably a limited amount of things that companies can do,” he said of sequestration planning. “People don’t really know what’s going to happen, so the only thing you can do is just try to have a tight understanding of your business.”

Officials at Fairfax-based ManTech said last week that they are expecting sales increases next year — assuming that sequestration doesn’t happen.

“Our initial view of fiscal year 2013 suggests revenue growth as we execute on record backlog and strong awards, but that of course will depend on sequestration, which is a big unknown right now,” said Kevin M. Phillips, the company’s chief financial officer, in a call with investors.

ManTech saw profits for the quarter ended Sept. 30 decline to $24.4 million (66 cents per share), from $34.5 million (94 cents) for the same period a year earlier. Revenue shrunk 12 percent to $645 million.

Still, contractors are tightening their business. Booz Allen officials said last week that the company is looking at ways to improve its cost structure and infrastructure and will make changes April 1.

“Privately, [the companies] all have contingency plans and they’re discussing what has to be done,” Loomis said. “Publicly, they’re not giving any numbers or guidance.”

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