Deltek Insight 2012: Financial Benchmarking for Government Contractors

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Many government contractors are experiencing significant challenges on how to compete for contract awards and still be able to maintain a profit margin. In 2012, contractors face the potential for another budget cycle, an election year and the looming sequestration. This session provides financial statistics on contractor performance for the last fiscal year including profit and growth trends, financial ratios and indirect rate statistics. Learn what strategies contractors are employing to become more cost competitive. Have the opportunity to learn how your organization compares to others in your industry. Intermediate Level.

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Deltek Insight 2012: Financial Benchmarking for Government Contractors

  1. 1. Financial Benchmarking forGovernment ContractorsLynne Gummo, Director, SC&H Group, LLCGC-185
  2. 2. SC&H Group, LLCRegional public accounting firm300 professionalsSpecialization in government contracting227 government contractorsOffices located in Sparks, MD and Tysons Corner, VAVoted Best of the Best in 2012Voted Best places to work in 2012
  3. 3. AgendaI Current EnvironmentII DemographicsIII Financial Ratios Financial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  4. 4. Current Environment Uncertainty
  5. 5. Current Environment Current Market Environment = Uncertainty Stock Market Volatility Need to Grow Revenue Federal Budget & Profits Cuts/Sequestration Growing internal & external pressures currently impacting Government’s Need forIncreased Competition the Greater Efficiencies GC industry Looming Elections Stagnant Economy Pricing Pressure
  6. 6. Current Environment Budget Overview and Spending Trends Federal Defense budget is facing $1 trillion in cuts over the next decadeOpportunities  Spending on efficiencies through IT  Funding in key national threat areas  Certain areas positioned to benefit from national security needs, such as cyber security, cloud computing, big data, C4ISR, signal intelligence, and mobile technologiesThreats  Large, non-critical procurements  Civilian agencies  Loss of jobs Source: Washington Technology
  7. 7. Current Environment Sequestration Threats Estimated impact of threats based on various studies$215 billion reduction in the nation’s gross domestic product 2.14 million jobs may be lost Personal earnings of the workforce are expected to decrease by$56.7 billion in spending cuts for defense $109.4 A potential loss of billion $59 billion Source: Federal Times, Washington Technology for non-Defense agencies
  8. 8. AgendaI Current EnvironmentII DemographicsIII Financial RatiosIIFinancial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  9. 9. Demographics 2011 FY Demographics227 Government Contractors99% Washington DC areaService basedPrivately heldRevenue ranged $1m - $250mMix of DOD, DHS, VA, NSA and other 3 letter agencies
  10. 10. Demographics Accounting Systems Used30% Quickbooks8% Costpoint7% Other products (including Procas, Microsoft, etc)55% GCS Priemier
  11. 11. Demographics Business Designations31% 8(a) companies22% SDVOB13% other small business designation34% other nondesignated companies
  12. 12. AgendaI Current EnvironmentII DemographicsIII Financial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  13. 13. Financial RatiosCurrent ratioAccounts receivable / Days sales outstandingNet profit marginSales growthDebt to equity
  14. 14. Financial Ratios Average Current Ratio Based on Revenue - 2011 3.50 3.00 2.50Ratio Scale 2.00 1.50 1.00 0.50 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  15. 15. Financial Ratios Average Current Ratio Based on Revenue - 2010 3.50 3.00 2.50Ratio Scale 2.00 1.50 1.00 0.50 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  16. 16. Financial Ratios Average Accounts Receivable Days Based on Revenue - 2011 100.00 90.00 80.00 70.00Number of Days 60.00 50.00 40.00 30.00 20.00 10.00 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  17. 17. Financial Ratios Average Accounts Receivable Days Based on Revenue - 2010 100.00 90.00 80.00Number of Days 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  18. 18. Financial Ratios Average Net Profit Margin Based on Revenue - 2011 10.00% 8.00%Net Profit Margin Percentage 6.00% 4.00% 2.00% 0.00% -2.00% $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  19. 19. Financial Ratios Average Net Profit Margin Based on Revenue - 2010 10.00% 9.00%Net Profit Margin Percentage 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  20. 20. Financial Ratios 120.00% Average Sales Growth Based on Revenue - 2011 100.00%Percentage Growth 80.00% 60.00% 40.00% 20.00% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,00050,000,001 - $100,000,000 $ Industry Revenue Level
  21. 21. Financial Ratios Average Debt-to-Equity Ratio Based on Revenue - 2011 3.00 2.50 2.00Ratio Scale 1.50 1.00 0.50 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  22. 22. Financial Ratios Average Debt-to-Equity Ratio Based on Revenue - 2010 3.00 2.50 2.00Ratio Scale 1.50 1.00 0.50 0.00 $0 - $10,000,000 $10,000,001 - $25,000,001 - $50,000,001 - Industry $25,000,000 $50,000,000 $100,000,000 Revenue Level
  23. 23. AgendaI Current EnvironmentII DemographicsIII Financial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  24. 24. Indirect Rates Companies by Fringe Rate 2011 2010 60 50Number of Companies 40 30 20 10 0 25% - 30% 30% - 35% >35% Range of Fringe Rates
  25. 25. Indirect Rates Companies by Client Overhead Rate 2011 2010 45 40Number of Companies 35 30 25 20 15 10 5 0 3% - 10% 10% - 20% >20% Range of Client Overhead Rates
  26. 26. Indirect Rates Companies by Company Overhead Rate 2011 2010 50Number of Companies 40 30 20 10 0 2% - 15% 15% - 25% >25% Range of Company Overhead Rates
  27. 27. Indirect Rates Companies by G&A Rate 2011 2010 60 50Number of Companies 40 30 20 10 0 8% - 12% 13% - 18% >18% Ranges of G&A Rates
  28. 28. Indirect Rates Costs as a % of RevenueDirect LaborDirect SubcontractorsHealth InsuranceTotal Fringe ExpenseRentInterestMarketingBid & Proposal Salaries
  29. 29. Indirect Rates Direct Labor (% of Revenue) Based on Revenue 2011 2010 60.00%Direct Labor as a % of Revenue 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenue
  30. 30. Indirect Rates Subcontractor Expenses (% of Revenue) Based on Revenue 2011 2010 35.00%Subcontractor Expenses as a % of 30.00% 25.00% Revenue 20.00% 15.00% 10.00% 5.00% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  31. 31. Indirect Rates Health Insurance Expenses (% of Revenue) Based on Revenue 2011 2010Health Insurance Expenses as a % of Revenue 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  32. 32. Indirect Rates Total Fringe Expenses (% of Revenue) Based on Revenue 2011 2010 18.00%Total Fringe Expenses as a % of Revenue 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  33. 33. Indirect Rates Rent Expense (% of Revenue) Based on Revenue 2011 2010 3.00%Rent Expense as a % of Revenue 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  34. 34. Indirect Rates Interest Expense (% of Revenue) Based on Revenue 2011 2010 0.80%Interest Expense as a % of Revenue 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  35. 35. Indirect Rates Marketing Expense (% of Revenue) Based on Revenue 2011 2010 1.60%Marketing Expense as a % of Revenue 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  36. 36. Indirect Rates Bid & Proposal Expense (% of Revenue) Based on Revenue 2011 2010 1.60%Bid & Proposal Expense as a % of Revenue 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% $0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 Ranges of Revenues
  37. 37. AgendaI Current EnvironmentII DemographicsIII Financial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  38. 38. Preparing for the Future Public Company Valuation Multiples Government Services Average EBITDA Multiple Sample 8/15/2011 8/15/2012 8.00xTEV/EBITDA 6.00x 7.07x 6.25x 5.77x 5.73x 4.00x 2.00x 0.00x Large Prime Contractors Other Defense Contractors Government Services Average Revenue Multiple Sample 8/15/2011 8/15/2012 1.00x 0.80xTEV/Revenue 0.88x 0.60x 0.79x 0.63x 0.57x 0.40x 0.20x 0.00x Large Prime Contractors Other Defense Contractors
  39. 39. Preparing for the Future Valuation DriversGC value drivers are influenced by specific qualitative factors. Valuation multiples can vary greatly depending on the company’s attributes. 10x + 8x – 9x 5x – 7x • 8(a) and set-aside contracts • Better mix of prime/sub contracts • Large prime awards • Less attractive service offerings • Longer-term contracts • Long-term unrestricted contracts • IT staffing, facilities • Decent visibility into backlog • Strong backlog and visibility management, etc. • Highly attractive service offerings • Proven growth rates > 10% • Mainly subcontractor positions • Mission critical capabilities • EBITDA margins 10-14% • Commodity type services • Highly cleared work – TS/SCI • Highly attractive service offerings • Growth rates > 15% • Few cleared employees • Some cleared work • Some key agencies
  40. 40. Preparing for the Future Valuation Bifurcation Key Areas Everything Else 10xFunding environment creates “haves”and “have-nots” HEALTH IT BIG DATA SIGINTMany buyers are pursuing key areas • Drives valuations higher MOBILE CYBER CLOUD COMPUTING SECURITYFunding uncertainty diminishes buyerinterest in non-key areas C4ISR
  41. 41. Preparing for the Future Trends in Buyer EnvironmentLarge Public Firms• Need acquisitions to supplement slow organic growth• Large cash reserves• More discriminating than in the pastPrivate Equity and Private Equity-Backed Companies• Buying like strategics through platform companies /• Need to deploy cash sitting in funds• Continued interest from familiar players as well as new entrants to GC spaceForeign-Owned / Foreign-Owned with U.S. Subsidiary• Less active than in recent years• European economic crisis• Currency fluctuations
  42. 42. Preparing for the Future Discriminating BuyersDeeply critical of pipeline and backlog  Key contracts  Need for visibility  Predictability  StabilityMore effort understanding differentiations in capabilitiesIntense focus on relationships with customersMore judicious of investment in “hot” areas  Not all intel gets the same treatment  More focus on the hottest areas
  43. 43. AgendaI Current EnvironmentII DemographicsIII Financial RatiosIV Indirect RatesV Preparing for the FutureVI Creating Value
  44. 44. Creating Value Begin With the End in MindDetermine what is important for the shareholder, and grow the company to build value in that area Valuation Culture • Type of work • Strategic value • Contract mix • Management team • Customer intimacy • Infrastructure
  45. 45. Creating Value The Obvious Contract Management Financial Management Processes Intangibles
  46. 46. Creating Value Contract Management Leverage set-asides for future F&O contracts  Build customer relationships  Strengthen capabilities and past-performance  Limit set-aside to the extent possible Pursue large, funded limited-awardee vehicles  Contract awardees can become valued targets (CIO-SP3) Solicit customer for sole source contract of any size  Prime past performance  Exclusivity for work Carefully consider Low Price Technically Acceptable (LPTA) “rate shoot-out” contracts  Performance risk  Margin impact Manage B&P investment to contracts that support company strategy
  47. 47. Creating Value Processes Backlog  Understand industry standard definitions for backlog calculation  Actively track your backlog Pipeline and opportunity tracking  Formalize internal tracking process with staff  Probability weight your pipeline opportunities  Benchmark actual contract awards versus expectations Sales forecast  Synthesize pipeline and backlog to generate sales forecast  Well supported forecast drives valuation  Forecast 2-3 years out Budget  Institute formal, annual budgeting process
  48. 48. Creating Value Financial Management Bill rate stability / growth  Build customer relationships Cost of generating revenue  Salaries  Fringe Beware of “buying” revenue via aggressive bill rates Infrastructure  Indirect labor  Enough to support growth, but not too much to drain profit
  49. 49. Creating Value Intangibles Client relationships  Depth is valuable  Visibility to client, even in sub position Differentiated offering  Unique is better  Scarcity of talent/IP/capability is valuable Culture  High employee morale and retention  Focus on fulfilling the mission
  50. 50. Current Environment Questions
  51. 51. SC&H Group, LLC Operational Financial Strategic Regulatory Compliance Contract Pricing Strategic ConsultingFAR and CAS Consulting Forward Pricing Rate Development Strategic Growth PlanningDCAA Audit Support Contract Pricing and Negotiation Organizational DevelopmentContract Compliance Contract Changes and Claims Change ManagementSystem assessments and certification Contract Billing Executive Mentoring Executive Compensation Business Performance ManagementOperations Infrastructure Corporate Finance Transaction AdvisoryCost Allocations Financial Analysis and Modeling Growth CapitalCost Allowability Market Analysis Mergers and AcquisitionsIndirect Rate Structures Risk Management Management BuyoutsDisclosure Statement Preparation Assurance Services Capital Raise (Debt/Equity Recap)Incurred Cost Submissions Corporate Tax Services Valuations Locations, Credits and Incentives
  52. 52. SC&H Group, LLC Lynne H. Gummo, CPA Director, SC&H Group 8300 Greensboro Drive, Suite 700, McLean VA 22102 Office: 703-852-1193 Fax: 703-287-5959 lgummo@scandh.com

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