The partial shutdown of the U.S. government could modestly diminish the revenues, earnings, and cash flow of certain government services contractors if affected agencies do not reopen in the next few weeks. The impact on revenues, earnings, and cash flow, and therefore on credit quality, will vary by company and depend on its exposure to the affected agencies, the types of work it performs, and its current financial position and liquidity. However, we expect few, if any, rating or outlook changes directly related to the shutdown, as most of the impact is likely to be temporary.
The proportion of business each company has from the affected agencies will determine if there will be a noticeable impact on revenues, earnings, and cash flow. Most of the large, publicly owned government service providers get most of their revenues from the U.S. Department of Defense, which is fully funded for fiscal 2019 (ending Sept. 30, 2019), but also have a material exposure to civilian government agencies (see chart 1). The shutdown affects nine of the 15 cabinet-level departments, as well as certain independent agencies like the Environmental Protection Agency, and some of the shut down agencies, including the State Department, Department of Homeland Security, and NASA, are large customers for government services contractors.
Chart 1
Most companies do not break out their revenues from each agency, so it's difficult to determine how much comes from the shutdown-affected agencies. However, two of the largest firms, Leidos Holdings Inc. and SAIC, make more than 35% of their sales to civilian government agencies. SAIC recently announced that it is losing about $10 million of sales a week from the shutdown, indicating that it affects about 30%-35% of its civil government business, and that the government owes it up to $50 million. Many of the smaller, privately owned companies we rate also have large exposures to civilian government agencies.
The type of work each contractor performs will also determine whether there is a temporary disruption or a permanent loss of earnings and cash flow. The shutdown allows affected agencies to perform only work deemed essential, such as the protection of State Department officials overseas. However, contractors honoring these contracts will not receive payment until after the shutdown ends. Revenues related to services like IT support, that can't be made up after the shutdown and aren't related to long-term projects, will likely be permanently lost. The contractors will also have to bear the costs of their employees who support the affected agencies, which could affect margins, unless they decide to furlough them to save money, as happened to a limited extent in the 2013 shutdown. Contractors are also likely not receiving payments for work completed before the shutdown at the affected agencies, as the payment offices are closed. New contract awards from the affected agencies will also likely be delayed. Unfortunately, firms do not give enough details on their contracts to determine the impact on individual companies, but we expect most of the impact to be temporary.
Companies that currently have weaker financial profiles or constrained liquidity are likely to experience the greatest impact on credit quality (see table 1), but we don't expect many rating or outlook changes. Although we believe contractors will recover most lost revenues and cash flow after the shutdown ends, the delayed payments could strain liquidity at some, mostly smaller firms, which generally keep less cash on hand and have smaller bank revolvers to support liquidity. The timing of the shutdown, which started on Dec. 22, 2018, likely means few companies will show a material impact for the quarter ended Dec. 31, 2018 (for companies that report on a calendar quarter basis). If the shutdown is resolved before the end of the March 2019 quarter, most of the impact, except any permanently lost sales and some higher employee costs, will likely not be apparent in quarterly financial results.
Table 1
| Rated Government Service Contractors | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Company | Business Risk | Financial Risk | Liquidity | Rating/Outlook | ||||||
|
Leidos Holdings Inc. |
Satisfactory | Significant | Strong | BBB-/Stable/-- | ||||||
|
CACI International Inc. |
Satisfactory | Intermediate | Adequate | BB+/Stable/-- | ||||||
|
ManTech International Corp. |
Fair | Minimal | Adequate | BB+/Stable/-- | ||||||
|
Science Applications International Corp. |
Fair | Intermediate | Adequate | BB/CWPos/-- | ||||||
|
Booz Allen Hamilton Inc. |
Satisfactory | Significant | Strong | BB/Stable/-- | ||||||
|
Perspecta Inc. |
Satisfactory | Aggressive | Adequate | BB/Stable/-- | ||||||
|
KeyW Corp. |
Weak | Aggressive | Adequate | B+/Stable/-- | ||||||
|
DynCorp International Inc. |
Weak | Aggressive | Adequate | B+/Stable/-- | ||||||
|
Engility Holdings Inc. |
Fair | Aggressive | Adequate | B+/Stable/-- | ||||||
|
KBR Inc. |
Weak | Aggressive | Adequate | B+/Stable/-- | ||||||
|
Vertex Aerospace Services Corp. |
Weak | Highly Leveraged | Adequate | B/Positive/-- | ||||||
|
Constellis Holdings LLC |
Weak | Highly Leveraged | Adequate | B/Stable/-- | ||||||
|
Guidehouse LLP |
Weak | Highly Leveraged | Adequate | B/Stable/-- | ||||||
|
Peraton Corp. |
Weak | Highly Leveraged | Adequate | B/Stable/-- | ||||||
|
PAE Holding Corp. |
Weak | Highly Leveraged | Adequate | B/Stable/-- | ||||||
|
Salient CRGT, Inc. |
Weak | Highly Leveraged | Adequate | B/Negative/-- | ||||||
|
Alion Science and Technology Corp. |
Weak | Highly Leveraged | Adequate | B-/Positive/-- | ||||||
| Ratings as of Jan. 10, 2019. | ||||||||||
We do not expect any material impact to defense contractors that are primarily manufacturers, as they generally have very little exposure to the affected agencies. For example, only about 10% of Lockheed Martin Corp.'s sales are to civilian government agencies. However, with the Departments of State and Commerce closed, exports could be delayed as most weapons sales to foreign customers require licenses from one of those departments. Some defense companies have material exposure to NASA, but this is mostly for work, such as building launch vehicles, that will resume once the shutdown is over, resulting in a only a temporary disruption to sales or cash flow. Defense contractors like General Dynamics that have large government services businesses will likely see the same modest impacts as the independent government service providers.
This report does not constitute a rating action.
| Primary Credit Analyst: | Christopher A Denicolo, CFA, Washington D.C. (1) 202-383-2398; christopher.denicolo@spglobal.com |
| Secondary Contact: | Stephen E Kahn, New York (1) 212-438-5012; stephen.kahn@spglobal.com |
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