Where does PAE go from here as a now-public company?

PAE has traded on the public markets for almost a week but it has been in business for six decades. Their chief executive tells us where PAE heads now as a public company.

From PAE’s point-of-view, they do not see their transition from being backed by private equity to now trading on the public markets as one that means a change in overall strategy and direction.

But one change has come to the 65-year-old PAE in the form of a new board of directors that includes independent members all public companies must have. They met for the first time on Friday, Feb. 14. Three days after the Falls Church, Virginia-based company’s shares began trading on the Nasdaq stock exchange.

Given the rarity of government services companies going public, I asked CEO John Heller if PAE’s new status has sunk in yet and he pointed to that board meeting as the “first big action" as a new public company.

“That brought it into a bit more of a reality for us,” Heller told me Wednesday. “Now that we’re a standalone public company, I see the opportunity for us to look to continue to grow the business… expand our customer base, expand our capabilities into higher-growth, higher-margin segments of the government services market."

Through both organic growth and acquisitions, PAE’s revenue has climbed from around $1.6 billion to nearly $2.6 billion for 2018. PAE paused on making deals in late 2018 as their now-former majority owner Platinum Equity started planning to exit, a move within the usual three-to-five year window that private equity firms typically own government services companies.

That period of time allowed PAE to focus exclusively on organic pursuits. While PAE’s results for 2019 are not filed yet, Heller said the National Security Solutions segment “has great potential for continued growth at a fast pace” and contributes nearly one-third of overall EBITDA (earnings before interest, taxes, depreciation and amortization).

NSS focuses on business process outsourcing, forensics, training support, and mission support services for defense, intelligence and homeland security missions. NSS is one of two segments alongside Global Mission Services, which specializes in logistics and stability operations, infrastructure management and force readiness support.

Heller described the higher-margin NSS segment as more “white collar” and the GMS business as “more blue collar,” but tied both to the overall orientation of what government agencies are looking for.

“Overall the company is very mission-focused, managing large outsourced missions of the U.S. government that require expertise in day-to-day management of a government activity,” Heller said, adding that also tasks PAE to understand “the process management of a government outsourced activity, and delivering that in a cost-effective way.”

PAE’s moves all point toward what the company referred to as “sticky base business” in its initial investor presentation. That means long-tenured contracts in mission areas that have existed for decades and are located around the world. Around 20,000 PAE employees work in 60 countries.

“We’re supporting whatever infrastructure, hardware or activity that the government has in place regardless of what types of systems they use to support it,” Heller said. “It typically takes decades of work and experience to be able to support what the government’s doing in these global markets.”

The NSS segment in particular may help explain how the frequent acquirer in PAE has used such deals to change itself and enter new markets over the past several years. PAE has made six total acquisitions with its last two private equity owners’ backings. Heller said most of those transactions have been in the $150 million-$250 million range.

PAE’s deals in 2015 for A-T Solutions in 2015 and the former USIS Global Security & Solutions helped form the NSS business. A-T Solutions specialized in training services for federal agencies and that work represented white space for PAE, which three years later won one of eight prime seats on a $2.4 billion Army training support contract.

A-T Solutions had also previously focused on winning smaller contracts prior to the purchase by PAE, Heller said.

PAE’s entry to the public markets was accomplished through what was technically another acquisition. In this case, the buyer was a special purpose acquisition company backed by private equity firm The Gores Group

The deal brought to PAE both new investors and a significant reduction in their debt load to 3.4 times adjusted EBITDA, which helps give more runway to make deals. A further restructuring of that debt is in the works to create even more room on the balance sheet for acquisitions, Heller said.

“As you look at 2020 and 2021, we’re going to be very active in the marketplace and use that as an element to continue to accelerate our growth,” Heller added.

They will be doing that against an overall market backdrop that looks much different than in 2013 at the height of sequestration cuts and other spending declines. Budgets have turned the other direction in the past few years.

“Our government customer is operating with good support from a budget standpoint that allows them to manage their agency without significant distraction,” Heller said. “The obstacles that existed years ago don’t seem to be as front and center.”

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