PAE sees 2021's funding picture looking like 2020

Perhaps the only certainty arising from Tuesday’s election is a continued divided government with Congress split between the two parties and the White House still in a state of TBD.

Also in the mix is a continuing resolution slated to expire Dec. 11, which some industry leaders have told investors during this quarterly financial reporting season that they expect to be extended in some way, shape or form.

During PAE’s third quarter earnings call Thursday, CEO John Heller said he also sees the CR getting “renewed or kicked to the right.”

Regarding next calendar year (or the current federal fiscal 2021), it may look a lot like this current one from a budget standpoint given the state of the world outside of politics.

“We just believe that for the 2021 budget, this not a year where either party is going to want to make the budget the central issue when we’re still dealing with the coronavirus,” Heller told analysts. “We do see this coronavirus problem extending into 2021 calendar year, so our expectation is from a budget standpoint we’re going to see a similar spending level in 2021.”

One particular customer of PAE was a point of analyst inquiry during the call in the State Department, where the company generated 24 percent of its $2.7 billion in revenue last year. That agency has been eyed for significant cuts during the Trump administration, although the reality has seen Congress enact much larger budgets since the president entered office in 2017.

Each fiscal year of Donald Trump’s presidency has seen Congress provide at least 30 percent more funding than he requested, the Congressional Research Service reported in October.

“(For) different administrations, obviously foreign policy and engagement externally is a less priority or a greater priority, I think over last few years we’ve seen it less aggressive externally in terms of engagement,” Heller said. “As that ebbs and flows, we could be looking at a period of time where we’d see an increase in focus with the State Department, engagement externally.”

Third quarter revenue fell 4.5 percent from the prior year period to $666.2 million, including a $53.3 million impact related to COVID-19. PAE also saw a year-over-year decline on its bottom line of 7.2 percent to $46.2 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

PAE narrowed this year’s expected revenue range to $2.625 billion-$2.675 billion with the adjusted EBITDA outlook left unchanged at $172 million-$178 million amid the company’s push for more profitable work and hence higher margins.

Meanwhile, PAE’s first acquisition in year one a publicly-traded government services company is taking place in an entirely different credit and overall financing market than that of in the coronavirus pandemic’s first few months.

The fact that Centra Technology is coming in tow for PAE this year means investors are curious about what else may be in the deal pipeline for the buyer with a debt refinancing deal done and the overall credit environment being more favorable.

“We see the domain of intelligence analytics as a significant focus area strategically for us,” Heller said. “We see medical services as a very strong growth area, as we’ve seen going through the coronavirus that medical services, medical support has become a bigger priority.

“We’ve seen this under both administrations that we’ve just gone through,” Heller added. “They will have a strong spending profile and support behind it.”

Backlog at the end of the quarter was $7 billion with $1.7 billion of it funded and a 1.1 book-to-bill ratio for the trailing 12 months to measure the rate of awards being booked versus drawdowns to recognize sales.

A favorable outcome in the Customs and Border Protection’s ongoing re-evaluation of proposals for a $1.3 billion aircraft maintenance contract, still anticipated for this year according to Heller, would raise all of those bookings numbers.