PEC aims to regain momentum

Wall Street worries company is stuck in holding pattern

PEC Solutions Inc.

Headquarters: Fairfax, Va.

www.pec.com

2003 revenue: $172 million

2004 Washington Technology Top 100 rank: 89

Employees: 1,223 as of Dec. 31, 2003

Lines of business: Professional technology services that help government entities use the Internet and other advanced technologies; migrating legacy computer systems and paper-intensive processes to integrated Web-enabled processes using e-government solutions

Major federal customers: Homeland Security and Defense departments, criminal justice and intelligence agencies, civilian e-government

David Karlgaard, president and chief executive officer of PEC Solutions Inc.

Susan Whitney-Wilkerson

Is PEC Solutions Inc. poised to rise or decline?

Since going public four years ago, PEC has faced a shareholder lawsuit and cutbacks in government spending. Recently, the company missed its revenue guidance for the sixth straight quarter.

"It's absolutely critical that investors have confidence in management's financial projections, and at this point investors are gun-shy about PEC's projections," said Timothy Quillin, a stock analyst with investment firm Stephens Inc. of Little Rock, Ark.

During this same period, however, the company's revenue has jumped from $53 million in 1999 to $172 million in 2003, and its profits have grown from $5.6 million to $17.2 million annually. Forbes magazine named PEC one of America's best small companies in 2001 and 2002.

"Missing six quarters in a row is a bit of an exaggeration," said David Karlgaard, president and chief executive officer of the Fairfax, Va., company, which sells a variety of e-government and IT services to government.

"If you go back and look at the facts, only two of those quarters we missed our earnings projections, and then several other quarters we might have missed revenue by a few thousand dollars," he said.

What has analysts worried is PEC's decline in revenue and profits since 2002, when it had $182 million in revenue and $22.3 million in net earnings. In 2003, the company had $172 million in revenue and earnings of $17.2 million.

In April, PEC lowered its 2004 revenue projection, dropping to between $172 million to $177 million from between $180 million to $195 million. The guidance for earnings was lowered from between 60 to 65 cents to between 52 to 55 cents.

The uncertainty about PEC's direction is evident in its stock rating: Of 14 Wall Street analysts who follow the company, 10 list PEC stock as "hold." Only one recommends buying the stock, while two rate it as underperforming, and one recommends selling.

The hold recommendation "reflects a show-me type of story or a wait-and-see type of story, based on the disappointing results they reported over the last couple of quarters," said Michael Keller, an equities analyst at KeyBanc Capital Markets.

Keller has a hold recommendation on PEC stock, which has fallen to about $10.50 per share from about $14.50 a year ago.

Joseph Vafi, managing director of equity research at Jeffries & Co., said PEC has not performed as well financially as other government contractors.

"Most other pure federal government IT players continue to report growth on their top and bottom lines," he said.

Vafi said that missing or hitting revenue projections is only somewhat important. The concern with PEC is that "its forward outlook continues to trend down, and that's more of a problem," he said.

Karlgaard said PEC hasn't gotten off track and will continue its strong pattern of growth. By this time next year, for example, he expects the company to have achieved 15 percent to 20 percent organic growth and 10 percent to 20 percent growth by acquisition.

Most of that, Karlgaard said, will come from the company's stable of federal clients that include criminal justice and intelligence agencies and the Homeland Security Department, which collectively account for about half the company's revenue. The rest of PEC's business is split between the Defense Department and civilian e-government organizations.

PEC's largest award last year was the five-year, $60 million contract to provide program management support for the U.S. Visitor and Immigration Status Indicator Technology program. In November, the company won a two-year, $14.8 million contract from the Drug Enforcement Agency to develop and deploy electronic commerce projects for the agency's Office of Diversion Control. The Drug Enforcement Agency's special projects division accounted for 11 percent of PEC's total revenue in 2003.

PEC also intends to make more acquisitions, which account for 10 percent of its annual growth, Karlgaard said. PEC is actively scouting profitable government IT services companies in the $10 million to $40 million range that have strong relationships with their clients, most likely ones that PEC does not do business with at the moment, he said.

PEC Solutions has bought three companies since going public in April 2000. Its purchase of Viking Technology in 2000 gave it an entry into the state and local government law enforcement area; Troy Systems in 2001 offered health care and financial management systems; and Vector Research in 2002 provided new civilian government clients, notably the IRS. PEC didn't make a purchase last year because the pricing was too high, Karlgaard said. Future acquisitions won't be a problem for the company because it has $105 million cash on hand, he said

Karlgaard also said the shareholder lawsuit is all but settled. Shareholders who lost money when PEC's stock dropped following revised financial forecasts filed a lawsuit against the company in March 2003, alleging that PEC executives had concealed the company's prospects. A Virginia district court dismissed the suit Jan. 28, but the plaintiffs filed a notice of appeal.

Karlgaard said he thinks the appeal will lead nowhere. "We have clear evidence that everything was done properly in this company, and a judge has concluded that after looking at the facts," he said. "We expect no further action on the matter."

PEC's poor financial results last year were in part because several large contracts were unexpectedly reduced, Karlgaard said. The company had a nine-month, $25 million contract to provide employee screening for the Transportation Security Administration. After the initial period ended, TSA gave PEC a five-year, $25 million contract for ongoing support work, he said.

On the second contract, PEC had its work whittled down on its subcontract with EDS Corp. on the 10-year Navy-Marine Corps Intranet project. As a result, PEC's revenue dropped from about $6 million a quarter to $2.5 million a quarter, he said.

But discounting these two contracts, the company had 18 percent growth in 2003, Karlgaard said.

"They were very high levels of concentration for those two contracts, and now they're much smaller, so the risk is much less," he said.

The company's bottom line was also hurt when a state-and-local customer reduced the scope of work on a project, which resulted in a write-off of $700,000 for the first quarter of 2004. PEC is renegotiating the contract with the customer, whom Karlgaard declined to name.

"We have a long history of success, and this past period has been very hard on us," Karlgaard said. "We've learned a lot during this period, and we are back and mobilized for the future."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close

Trending

  • Dive into our Contract Award database

    In an exclusive for WT Insider members, we are collecting all of the contract awards we cover into a database that you can sort by contractor, agency, value and other parameters. You can also download it into a spreadsheet. Our databases track awards back to 2013. Read More

  • Navigating the trends and issues of 2016 Nick Wakeman

    In our latest WT Insider Report, we pull together our best advice, insights and reporting on the trends and issues that will shape the market in 2016 and beyond. Read More

contracts DB

Washington Technology Daily

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.