Executives and business owners of government contractors are constantly evaluating new opportunities that can grow their business and add value to shareholders. To finance these opportunities, business owners have two primary funding options: equity or debt. Each option has different characteristics and a unique impact on the Company’s earnings, taxes, and financial strength. Equity capital is typically a more time consuming and expensive source of funding for smaller private companies. Debt capital is generally the optimal source of funding for future expansion. Debt is a quicker and less expensive option, provides significant tax advantages, and allows shareholders to maintain their ownership levels.
There are two main types of debt: senior debt and mezzanine. Senior debt is the less expensive and more common form of borrowing. Most senior debt lenders expect a company to have the debt collateralized by assets; therefore, a company’s balance sheet capacity typically determines the funding level they can raise. Sometimes, a private
With tightening budgets, increased oversight, and higher costs of doing business, government contractors need to rethink all aspects of their business. Aronson’s new white paper, “<RETHINK> Everything: The New Imperative for Federal Government Contractors,” offers insights for government contractors who want to thrive in this new era:
Download this insightful white paper to learn how the larger market trends are already affecting government contracting and what aspiring contractors can do to succeed.
During the last two weeks of October and first two weeks of November, all major Tier 1 and Mid-Tier Defense and Government Services contractors reported calendar Q3 results. This was good news for our Tier 1 index, who all reported Earnings Per Share (“EPS”) ahead of analyst expectations and raised full year 2013 EPS guidance. The market responded positively to the news, as four of six companies in our index experienced share price increases the day following the release of Q3 results. However, our Mid-Tier index did not fare as well, as over half of the companies lowered either revenue or EPS guidance (or both). Eight of 11 contractors in our Mid-Tier index experienced share price drops following the release of their Q3 earnings.
Based on calendar Q3 results, it appears continuing sequestration has impacted the Mid-Tier index more significantly than the
Government contractors of all sizes have certainly felt the impact of reduced spending and sweeping cuts over the last year. However, it is likely that the greatest damage is still to come. DoD spending cuts are expected to increase by 40% in FY2014 as compared to FY2013 ($52B vs. $37B). Additionally, mitigation tools and resources that have reduced the impact in FY2013 may not be available in FY2014 and future periods.
To date, the DoD has cut spending through furloughs and reductions in training, travel, and maintenance expenses. Additionally, the DoD has used unobligated funds from prior years to soften the impact of sequestration. Approximately $6B of unobligated funds from prior years was used to dampen spending reductions. Current sequestration plans demand $1 trillion of spending reductions over a 10-year period, with only $37B of that amount realized in FY2013. As the effectiveness of some of these mitigation techniques diminish, leaders will have to make tougher decisions on what expenses to attack next.
Continue reading about the challenges and implications of an uncertain future market in Aronson Capital Partners’ September Market Update.
Larry A. Davis will be speaking at the upcoming 13th Annual Defense, Aerospace and Government Services M&A Conference hosted by Pillsbury Law.
The industry is in flux again, this time due to sequestration and changing budget priorities. M&A activity has been significantly affected. Is this the new normal?
A new year and a new set of challenges face the Defense, Aerospace and Government Services industry. How best to move forward with sequestration? Is 2013 an indication of the future? The impact these and other issues will have on the defense, aerospace and government contracting industry and the M&A marketplace are vital for us all to understand.
Leading companies, top executives and industry experts will address these questions and much more at our 13th annual Defense and Government Services M&A conference focused on merger and acquisition trends and strategies in the Federal sector.
CLICK HERE to Register for the Event
Time: 7:30am – 10:00am
Location: Ritz-Carlton, Tysons Corner Hotel, 1700 Tysons Blvd., McLean, VA 22102