Inside Caliburn's IPO filing

Caliburn International’s filing for an initial public offering to raise $100 million from investors gives a rare look inside this government services contractor’s book of business and its plans for growth.

While the filing also makes clear that Caliburn’s private equity owner DC Capital is looking to realize some of its investment, we also get a rare glimpse of similar information that a prospective buyer (if DC Capital gets an offer it likes that is) would want as part of its own decision-making process.

Here are some items I found of interest in Caliburn’s “S-1” registration statement to the Securities and Exchange Commission. All of this of course comes with the caveat of whether the IPO goes through, as recent history of government market IPO filings tells us.

Do not expect a dividend

As the filing states in a straightforward manner: “We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our Class A common stock.”

This would put Caliburn in line with CACI International, which has never paid dividends on its stock since going public in 1968. Neither has Vectrus, the former services business of Exelis that spun out four years ago.

ICF was a non-dividend paying company since its 2006 IPO up until this year, when the consulting services company said it would start paying dividends thanks to savings from last year’s sweeping corporate tax reduction. Engility Corp. has been restricted from paying dividends since it acquired TASC in 2015 due to debt covenant agreements for credit facilities.

But they do expect and hope to buy

Like many other government services companies, Caliburn is pursuing acquisitions in areas such as government IT and the intelligence community as a way to position itself in areas primed for growth. The filing touts DC Capital’s “previous experience building U.S. federal government services companies” like SC3, which was sold to General Dynamics last year; and National Security Interest Corporation, which was sold to IBM in 2010.

Caliburn expects to use proceeds from an IPO for “general corporate purposes, which may include acquisitions, although we do not have any agreement or understanding with respect to any such acquisition at this time.” It appears that the company is exploring the IPO to raise equity from investors to support its acquisition strategy.

Although the company does caution that its top- and bottom-line performance could suffer if they “are unable to successfully identify suitable acquisition candidates and integrate companies we acquire into our operations on a timely basis.”

Revenue is both down and concentrated

Given that Caliburn was rolled together only in August, a year-over-year comparison of its revenue profile is tough even with the “pro forma” approach typical when factoring in acquisition history.

However, a cursory look at the revenue breakdown of Caliburn’s businesses indicates across-the-board declines last year of between 13 and 19 percent for each of them. Much of that is attributed to the completion of projects, which means contracts without a recompete opportunity.

Caliburn does tout a recompete win rate of around 90 percent, which is typical for most government services companies. But 38 percent of its revenue came from one foreign military sales contract to support an Air Force base in Iraq that expires next month. The company is negotiating extensions to continue work through January 2021. But they “cannot assure (investors) that we will be successful in extending our arrangements at Balad Air Force Base on similar terms or at all.”

And here is the plan to change that

Caliburn’s filings call out health care programs for the Defense, Homeland Security and the Health and Human Services departments as avenues of growth for the company’s medical exam management and medical services. The company also provides those services at U.S. embassies and consulates for the State Department.

Additionally, Caliburn is targeting the Army’s potential $82 billion “LOGCAP V” contract due for award in April. LOGCAP is the Army’s main contract vehicle for overseas logistics support and will have between four and six awards. Analysts at Moody’s Investor Service have capped the number of bidders at 10, including the four incumbents and two other known bidders.

Here is how Caliburn’s revenue for last year breaks down by federal government customer. Fifty percent came from the Defense Department, 23 percent from State, 4 percent from Homeland Security, 8 percent from Health and Human Services, 1 percent from Energy and 1 percent from Interior and classified agencies. Eleven percent was with commercial customers and the remaining 1 percent from international government entities such as NATO and the United Nations.

The debt is what it is

Publicly-traded government IT and professional services companies typically have debt ratios of nearly 3 times their earnings before interest, taxes, depreciation and amortization expenses. Investors look at debt ratios to both measure a company’s resources to make acquisitions and determine how many years are needed to pay down that debt at current profit levels.

On a pro forma basis, Caliburn’s filings indicate total debt of $353.2 million on the books and $100.1 million in adjusted EBITDA. That indicates a debt-to-EBITDA ratio of 3.5, right at the ceiling of what companies in the market typically go to. Private equity-backed companies are usually highly-leveraged when they undertake an IPO so paying down debt would be a priority for Caliburn should they go through with the offering.

Case in point: when the former Vencore filed to go public in June of last year, that registration statement showed $767 million in debt on the books and $122.8 million in adjusted EBITDA. That indicated a debt ratio of around 6.2 times adjusted EBITDA. Veritas Capital owned Vencore and its predecessor companies for seven years before the complex deal to create Perspecta in June.