Government services businesses have weathered the COVID-19 storm better than many other industry verticals but have still grappled with their own uncertainties. These businesses navigated the start of pandemic recovery, shifting election expectations and a continuing resolution in the third quarter of 2020.
Top executives in the government services space highlighted opportunities and strategic initiatives in their Q3 earnings calls, which took place between Oct. 29 and Nov. 12. And in the weeks since those calls, the landscape for 2021 and beyond has continued to take shape with the help of U.S. elections and new legislation.
Specifically, the companies represented in this report are ManTech International Corp. (MANT); Booz Allen Hamilton (BAH); Leidos Holdings (LDOS); ICF International (ICFI); Parsons Corp. (PSN); Perspecta (PRSP); Pacific Architects and Engineers (PAE); Vectrus (VEC), and CACI International Inc. (CACI).
Across the calls, the transcripts of which were published by Bloomberg, five key themes rose to the surface.
1. The results of the election matter but don’t warrant a quick trigger.
The result of the U.S. presidential election is meaningful but not critical to government services businesses. The slow and deliberate nature of the federal government (particularly under a divided Congress) usually prevents quick and significant changes in federal spending levels. Both parties appear aligned on issues involving national defense, suggesting steady state defense spending going forward. And on Jan. 1, a bipartisan Congressional vote overrode President Trump’s veto of the National Defense Authorization Act for fiscal year 2021.
On Nov. 5, John Wasson, CEO of ICF International, highlighted his view of election impacts and the government’s pace of change. “The U.S. government is like a huge aircraft carrier—it doesn’t change direction quickly,” he said. “And we’ve generally been able to grow our business and find opportunities in both Republican and Democratic administrations. … I’d also say it’s our experience that budgets tend to hold up and don’t change radically when there’s divided government.”
2. Even before spending legislation passed, contractors were solidly positioned.
After entering fiscal 2021 under a continuing resolution, contractors did not expect meaningful short-term changes in federal spending. In the earnings calls, which preceded the Dec. 27 finalization of the $2.3 trillion omnibus bill that includes $900 billion in COVID-19 aid, contractors said they expected Congress’ focus to remain on economic recovery and the possibility of additional federal relief. The new spending package extended section 3610 of the Coronavirus Aid, Relief and Economic Security Act through March 31.
John Heller, CEO of PAE, said on Nov. 12 he expected a continued bump in discretionary spending associated with COVID-19, but for total discretionary spending to flatten or decline slightly in the longer term. However, he expressed confidence that “the federal government will continue to rely on contractors to perform mission-essential services, even in a flat or slightly declining total budget environment.”
3. The federal government’s strategic initiatives provide for plenty of opportunity.
Government services contractors continued to see growth opportunity within the federal defense budget, additional COVID-19 response spending and other discretionary spending categories. The federal government’s focus on IT modernization, 5G, national security and artificial intelligence continues to provide growth opportunities for contractors with relevant capabilities in the near and long term.
Perspecta CEO Mac Curtis highlighted opportunity around IT modernization, in addition to the continued focus on cybersecurity and trusted environments, given the increased threats around networks, infrastructure and supply chains.
4. M&A is in full swing.
The M&A environment continues to be robust, as executives highlighted M&A as a strategic growth initiative to gain access to customers, contract vehicles and added capabilities. Contractors continued to focus on target fundamentals and did not feel rushed to close deals for the sake of closing deals.
CACI emphasized M&A as a No. 1 strategic priority. CEO John Mengucci elaborated on the company’s M&A strategy, noting on Oc.t 29 that an acquisition must “fill gaps which enhance existing capabilities” and “expand our customer base.”
5. A remote workforce unlocks access to top talent.
Remote work and virtual onboarding continue to be successful where possible. However, some companies noted that employees are taking less paid time off, which boosts utilization and profitability in the short term but raises concerns around long-term sustainability.
While the pivot to a remote workforce has required great care and investment, CACI CFO Thomas Mutryn highlighted the benefit of expanding the company’s hiring pool to talent from geographies outside of Washington, D.C. CACI can “look broadly for talent to support CACI, [and] that should be powerful for both supporting our customers as well as [CACI] indirect initiatives,” he said.
Company executives in the sector remain agile in an effort to anticipate future government spending trends and public health needs. We expect Q4 2020 earnings calls to center around the fiscal 2021 federal budget appropriations, priorities of the new Biden-Harris administration and long-term strategies that align with civilian agencies expected to be favored by the new administration.