Ross Wilkers

COMPANIES

CSRA presses pause on M&A, sees organic growth returning

CSRA has been a major player in federal contracting’s active merger-and-acquisition scene this year through two major transactions of its own but is now taking a timeout from the M&A environment.

Speaking on CSRA’s fiscal second quarter earnings call Tuesday, CEO Larry Prior said, “We're pretty well done with acquisitions” after almost $340 million worth of them: the $104 million buy of defense telecommunications company NES Associates in July and a pending $235 million purchase of intelligence community IT outfit Praxis Engineering announced in mid-October.

Given the need to integrate NES and close on Praxis, Prior said to not “expect that pace to keep up over the next couple of quarters.” This comes amid an environment that has seen a rapid pace of deals from platform giants like Northrop Grumman and L3 Technologies, plus the planned three-way merger of DXC Technology’s U.S. public sector arm with Vencore and KeyPoint Government Solutions.

Prior also told analysts that the deals “position (CSRA) to take share in priority national security markets” of defense and intelligence. Defense and intelligence -- including IT in both -- are two priority areas for President Donald Trump’s administration as he has sought large security spending increases with civilian budget cuts as an offsetting measure.

CSRA is “happy to have found two gems back to back” as Prior noted and the company also was pleased about robust bookings in its July-September quarter that is traditionally the busiest awards period for federal agencies. Even in a civilian market some investors had speculated would be relatively softer, Prior said “so far it’s been business as usual.

The company recorded a book-to-bill ratio of 3.3 -- backlog additions versus drawdowns for revenue -- on $4.2 billion in bookings anchored by its joint venture’s win of a potential 10-year, $2.4 billion IT services contract with an unnamed Defense Department agency first disclosed in September.

Second quarter revenue of $1.3 billion was in-line with Wall Street’s expectation and was up 0.8 percent to show CSRA’s first quarter of year-over-year sales growth since its launch two years ago, which Prior termed a “major milestone.”

“Our year-over-year growth will accelerate through the back half of the (fiscal) year up to and perhaps beyond our long-term target of 2-3 percent,” Prior added.

That DOD IT recompete was CSRA’s largest at 5 percent of total revenue and while details from the company are cryptic, industry analysts and observers are fairly certain that the contract won is Greenway -- the largest portion of CSRA’s Groundbreaker contract the National Security Agency is breaking up three separate pieces.

Groundbreaker was awarded to CSRA predecessor Computer Sciences Corp. in 2001 with a $5 billion ceiling.

Prior did tell analysts that the Greenway portion CSRA’s joint venture with Northrop Grumman won calls for a “technical solution, a hybrid infrastructure built with our strategic partners, including Amazon Web Services, Microsoft, ServiceNow and Cisco as well as dedicated VMware and Oracle stacks.”

A second portion of Groundbreaker was awarded to AT&T and subsequently protested in mid-October by DXC Technology -- for whom industry analysts believe CSRA is a subcontractor to. CSRA is continuing the work under heritage Groundbreaker until the protest’s resolution. A third award from Groundbreaker is still pending.

Those two portions are 2 percent combined on CSRA’s revenue. The next major recompete for CSRA is the Transportation Security Agency’s lucrative five-year, $767.5 million “IMPACT” IT infrastructure contract. First awarded in 2015, IMPACT is 3 percent of CSRA’s revenue and Deltek data indicates an award is anticipated for December.

CSRA held to its full fiscal 2018 sales guidance of $5 billion-$5.2 billion, in-line with analysts’ expectations and a range which Chief Financial Officer David Keffer said they “expect to be near the top end of” in part on added contributions from NES and Praxis.

The stock did open almost 6 percent lower in morning trade Monday as its second quarter earnings of 46 cents per share fell below Wall Street’s 48-cent outlook.

CSRA also reiterated its $1.88-$2.00 per share guidance for the full year versus the $1.96 consensus. That range is one Keffer said CSRA is “ending out the year in the lower part” of on investments in the company’s milCloud 2.0 contract with the Defense Department and other programs.

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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