PAE sees COVID economic stimulus 'trickle down' effect on government services
By
Ross Wilkers
PAE executives view restoring the economy as priority number one for its main U.S. government customer well into 2022 and that the federal services marketplace will get a boost as well.
PAE became a publicly-traded company in February, before the coronavirus pandemic was deemed such, so in one sense the government services contractor is not isolated from turbulence in the global financial markets.
The company’s stock price closed its first day on the NASDAQ at $11.50, then gradually tumbled to a bottom of $3.45 by March 18 at the peak of economic fears but is now back above $9.00 during Friday’s session. It goes without saying PAE was far from the only company who saw a valuation hit on these macroeconomic concerns that saw global equities lose trillions and throw markets into dysfunction.
Qualitatively speaking, how does what happened to the economy and the government’s massive spending aimed at restarting it factor into how PAE sees the overall market landscape?
“Our outlook right now is that the government’s focus is on shoring up the economy and I’d say the same for foreign governments as well,” PAE CEO John Heller told investors Thursday during the company’s first quarter earnings call. "We expect that will carry forward into 2021 and potentially even into 2022 regardless of party.
"The economy is going to be the number one priority and the government’s going to use every tool they have in their bag to help stimulate that, and I think we’re going to see that trickle down into strong government services spending.”
Quantitatively speaking, PAE has joined one cadre of government contractors that has the same expectations of financial performance it did before the COVID-19 crisis. Falls Church, Virginia-based PAE continues to see $2.75 billion-$2.85 billion and $170 million-$178 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
COVID-19 did impact PAE’s first quarter results to the tune of $14 million in revenue and $1 million in adjusted EBITDA with the second quarter expected to also see a hit at a comparable level. But Chief Financial Officer Charles Pfeiffer said 95 percent of PAE’s direct workforce continues to be on the job and the company is able to utilize the CARES Act economic stimulus law to recover costs for keeping employees who cannot get to their sites in a ready state.
In addition, the company holds a $6.4 billion backlog as of the quarter’s end at roughly level to the same period last year and has $7 billion in bids it is awaiting award decisions on.
Outside of top- and bottom-line growth, one of PAE’s main priorities in becoming a publicly-traded company was to pay down its debt and the transaction that took it to the public markets almost halved that debt.
First quarter pay-downs took PAE’s leverage ratio to 3.1 times adjusted EBITDA and net debt to $536 million. Pfeiffer told analysts that because the pandemic largely froze debt markets, the company is waiting to see how they bounce back before proceeding on a debt refinancing commitment.
Debt pay-downs would give PAE more resources for another top corporate priority: making more acquisitions. Closing those deals is also on temporarily on hold for PAE because of the pandemic’s effects, Heller said.
“With the debt markets not really supportive in a beneficial way of what we can do to actually execute those kinds of deals, we’ve really put a pause on the M&A and just focused on operations, focused on cash right now, and waiting for the debt markets to return to something more normal where we can see a light on refinancing our own debt as a priority and then looking at strategic add-ons after that,” Heller said. “We still see this as a great part of the growth strategy for PAE and we expect to be active as the market recovers.”