M&A

CSRA strikes first deal, to pay $105M for NES Associates

CSRA is making its first acquisition since its launch in 2015. The technology services contractor will pay $105 million in cash for Alexandria, Va.-based telecommunications services contractor NES Associates.

CSRA executives said in their fourth quarter earnings call with investors Wednesday the deal is slated to close by the end of the second quarter on Sept. 30. The purchase price was detailed in the company’s annual 10-K regulatory filing with the Securities and Exchange Commission. Financial impacts such as revenue contributions from NES were not disclosed.

NES offers IT infrastructure, network operations, data center and application-related services to defense agencies. For example, the company helped migrate the Defense Logistics Agency’s 40,000-user email system to a Microsoft Office 365 environment.

“NES has hands-on expertise with nearly every military base network infrastructure” both within and outside the continental U.S., CSRA CEO Larry Prior said in the call. “This experience can directly translate to other security-sensitive customers, such as Homeland Security as well as the intelligence community.”

Tysons-based investment bank KippsDeSanto & Co. advised NES on the transaction. The deal comes almost one month since Prior himself predicted there would be more consolidation in the government services market during remarks to a Northern Virginia Technology Council breakfast event.

Falls Church, Va.-based CSRA started trading in November 2015 upon the merger of the former Computer Sciences Corp. U.S. government business into SRA International. CSRA entered the market with $3.1 billion in total debt that included $1 billion inherited from SRA.

CSRA had planned at its inception to allocate 10 percent of its free cash flow for acquisitions but instead used 79 percent to take down debt with the remaining 21 percent for shareholder return, Prior told analysts.

“Over the next few years, we'll likely take down debt a little bit slowly, gradually dedicating less than half of our free cash flow towards debt reduction and bringing our capital allocation more into balance,” Prior added.

The company reported $2.5 billion in debt as of April 1, 2017, and adjusted earnings before interest, debt, depreciation and amortization expenses of $792 million to show a debt-to-EBITDA ratio of 3.17. CSRA expects adjusted EBITDA of $770 million-$800 million for its next fiscal year.

Shares in CSRA opened up 5 percent to $31.11 as of 10:00 a.m. Thursday as investors welcomed news of the  transaction and full-year guidance that implies organic growth.

CSRA's outlook for its 2018 fiscal year, which started April 2, projects a nearly 2 percent organic growth increase from the $4.99 billion in FY 2017 sales reported in its fourth quarter and year-end financial statement.

The company forecasts $5 billion-$5.2 billion in 2018 sales excluding NES’ contributions with the $5.1 billion midpoint slightly below Wall Street’s consensus outlook of $5.12 billion.

Earnings guidance for 2018 of $1.88-$2.00 per share with a $1.94 midpoint that slightly missed analyst expectations of $1.95.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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