What the budget might mean for government contractors

Prospects of a budget making its way out of Congress looked brighter after Senate leaders struck a two-year agreement Wednesday to bust both defense and civilian spending caps.

That figures to give government contractors what they have long hoped for: long-term visibility into agency spending priorities. So what are services contractors paying particular attention to?

Speaking on CSRA’s third quarter earnings call with investors Wednesday, CEO Larry Prior said they will be looking at the “funding around federal IT and seeing the emphasis around cyber, around cloud and around data analytics.”

He predicted a mid-to-late March timeframe for lawmakers to complete an omnibus spending bill that would fold 12 appropriations bills into a single legislation.

Under the Senate agreement, fiscal year 2018 defense spending caps would go up $80 billion and civilian caps by $63 billion. Fiscal 2019 caps for defense would go up another $85 billion and civilian by $68 billion.

“I think it may take a bit longer to get to the details that everybody is looking to see as you look at the appropriations bills forming into that omnibus. What we need first is setting the budget caps, breaking sequestration and raising the debt limits, and that's well underway,” Prior told analysts on the call.

Falls Church, Virginia-based CSRA is also the latest government IT contractor to detail the effects of the December tax reform legislation.

CSRA expects its effective tax rate -- federal, state and local – to fall into the mid-20 percent range over the long-term from its current rate in the mid-to-high 30 percent range.

That follows Booz Allen Hamilton’s forecast earlier this week of a 25-27 percent effective tax rate over the long-term versus its prior 37-38 percent rate under the old tax code. And CACI International said last week its federal income tax rate should fall to 21 percent versus 35 percent.

“The majority of the tax reform savings will fall to the bottom line,” Prior said. “We'll stay sensitive to competitive forces in the marketplace, but we do not expect this benefit to be competed away.”

Chief Financial Officer David Keffer told analysts the tax code changes do not “meaningfully change our capital allocation priorities” in terms of debt repayment and shareholder return.

It will also evidently not mean CSRA will look to return to the active acquisition market, as executives had indicated to investors in November.

Third quarter revenue climbed 7.4 percent over the prior year period to $1.31 billion, which topped the analyst consensus of $1.27 billion. Organic growth for the quarter was around 2 percent when excluding contributions from the NES Associates and Praxis Engineering acquisitions.

CSRA also lifted the lower end of its guidance for the current fiscal year ending in March to $5.15 billion from $5 billion, while the high end is unchanged at $5.2 billion.

Chief Financial Officer David Keffer told analysts the company’s next fiscal year “shows us an opportunity for another organic growth year” as its trailing 12-month book-to-bill ratio came in at 1.7 at the third quarter’s end.

The ratio measures how quickly a company adds contracts to its backlog versus drawdowns from that to recognize revenue. Book-to-bill for the third quarter was 1.3.

Third quarter earnings of 56 cents per share also exceeded Wall Street’s expectations of 47 cents EPS.

Earnings guidance was also raised to $2.00-$2.05 per share from the previous $1.88-$2.00 EPS range.