deltek insight 2012: financial benchmarking for government contractors
DESCRIPTION
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.TRANSCRIPT
Financial Benchmarking for Government Contractors
Lynne Gummo, Director, SC&H Group, LLCGC-185
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
I Current Environment
II Demographics
III Financial Ratios Financial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
Current Environment
Uncertainty
Stock Market Volatility
Growing internal & external pressures currently impacting
theGC industry
Federal Budget Cuts/Sequestration
Government’s Need for Greater Efficiencies
Stagnant Economy
Pricing Pressure
Looming Elections
Increased Competition
Need to Grow Revenue & Profits
Current Environment
Current Market Environment = Uncertainty
Opportunities 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 technologies
Threats Large, non-critical procurements Civilian agencies Loss of jobs
Federal Defense budget is facing $1 trillion in cuts over the next decade
Source: Washington Technology
Current Environment
Budget Overview and Spending Trends
$215 billion reduction in the nation’s gross domestic product
2.14 million
jobs may be lost
$56.7 billion in spending cuts for defense
Current Environment
Personal earnings of the workforce are expected to decrease by
$109.4 billionA potential loss of
$59 billion for non-Defense agencies
Estimated impact of threats based on various studies
Source: Federal Times, Washington Technology
Sequestration Threats
I Current Environment
II Demographics
III Financial RatiosIIFinancial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
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
2011 FY Demographics
Demographics
30% Quickbooks
8% Costpoint
7% Other products (including Procas, Microsoft, etc)
55% GCS Priemier
Accounting Systems Used
Demographics
31% 8(a) companies
22% SDVOB
13% other small business designation
34% other nondesignated companies
Business Designations
I Current Environment
II Demographics
III Financial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
Financial Ratios
Current ratio
Accounts receivable / Days sales outstanding
Net profit margin
Sales growth
Debt to equity
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Average Current Ratio Based on Revenue - 2011
Revenue Level
Rat
io S
cale
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Average Current Ratio Based on Revenue - 2010
Revenue Level
Rat
io S
cale
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00 Average Accounts Receivable Days Based on Revenue - 2011
Nu
mb
er o
f D
ays
Revenue Level
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
Average Accounts Receivable Days Based on Revenue - 2010
Revenue Level
Nu
mb
er o
f D
ays
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00% Average Net Profit Margin Based on Revenue - 2011
Net
Pro
fit
Mar
gin
Per
cen
tag
e
Revenue Level
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
Average Net Profit Margin Based on Revenue - 2010
Revenue Level
Net
Pro
fit
Mar
gin
Per
cen
tag
e
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00% Average Sales Growth Based on Revenue - 2011
Per
cen
tag
e G
row
th
Revenue Level
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
0.50
1.00
1.50
2.00
2.50
3.00 Average Debt-to-Equity Ratio Based on Revenue - 2011
Rat
io S
cale
Revenue Level
Financial Ratios
$0 - $10,000,000 $10,000,001 - $25,000,000
$25,000,001 - $50,000,000
$50,000,001 - $100,000,000
Industry0.00
0.50
1.00
1.50
2.00
2.50
3.00
Average Debt-to-Equity Ratio Based on Revenue - 2010
Revenue Level
Rat
io S
cale
I Current Environment
II Demographics
III Financial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
Indirect Rates
25% - 30% 30% - 35% >35%0
10
20
30
40
50
60
Companies by Fringe Rate
2011 2010
Range of Fringe Rates
Nu
mb
er o
f C
om
pan
ies
Indirect Rates
3% - 10% 10% - 20% >20%0
5
10
15
20
25
30
35
40
45
Companies by Client Overhead Rate
2011 2010
Range of Client Overhead Rates
Nu
mb
er o
f C
om
pan
ies
Indirect Rates
2% - 15% 15% - 25% >25%0
10
20
30
40
50
Companies by Company Overhead Rate
2011 2010
Range of Company Overhead Rates
Nu
mb
er o
f C
om
pan
ies
Indirect Rates
8% - 12% 13% - 18% >18%0
10
20
30
40
50
60
Companies by G&A Rate
2011 2010
Ranges of G&A Rates
Nu
mb
er o
f C
om
pan
ies
Indirect Rates
Direct Labor
Direct Subcontractors
Health Insurance
Total Fringe Expense
Rent
Interest
Marketing
Bid & Proposal Salaries
Costs as a % of Revenue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Direct Labor (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenue
Dir
ect
Lab
or
as a
% o
f R
even
ue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Subcontractor Expenses (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Su
bco
ntr
acto
r E
xpen
ses
as a
% o
f R
even
ue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
Health Insurance Expenses (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Hea
lth In
sura
nce
Expe
nses
as
a %
of
Reve
nue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Total Fringe Expenses (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Tota
l Frin
ge E
xpen
ses
as a
% o
f Rev
enue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Rent Expense (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Rent
Exp
ense
as
a %
of R
even
ue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
Interest Expense (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Inte
rest
Exp
ense
as
a %
of R
even
ue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Marketing Expense (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Mar
ketin
g Ex
pens
e as
a %
of R
even
ue
Indirect Rates
$0 - $10,000,000 $10,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,0000.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Bid & Proposal Expense (% of Revenue) Based on Revenue
2011 2010
Ranges of Revenues
Bid
& P
ropo
sal E
xpen
se a
s a
% o
f Rev
enue
I Current Environment
II Demographics
III Financial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
Preparing for the Future
Public Company Valuation Multiples
Government Services Average EBITDA Multiple Sample
Large Prime Contractors Other Defense Contractors0.00x1.00x2.00x3.00x4.00x5.00x6.00x7.00x8.00x
6.25x 5.77x7.07x
5.73x
8/15/2011 8/15/2012
TEV/
EBIT
DA
Government Services Average Revenue Multiple Sample
Large Prime Contractors Other Defense Contractors0.00x0.10x0.20x0.30x0.40x0.50x0.60x0.70x0.80x0.90x1.00x
0.79x
0.63x
0.88x
0.57x
8/15/2011 8/15/2012
TEV/
Reve
nue
Preparing for the Future
GC value drivers are influenced by specific qualitative factors. Valuation multiples can vary greatly depending on the company’s attributes.
5x – 7x8x – 9x
10x +
• Large prime awards• Long-term unrestricted contracts• Strong backlog and visibility• Highly attractive service offerings• Mission critical capabilities• Highly cleared work – TS/SCI• Growth rates > 15%
• Better mix of prime/sub contracts
• Longer-term contracts
• Decent visibility into backlog
• Proven growth rates > 10%
• EBITDA margins 10-14%
• Highly attractive service offerings
• Some cleared work
• Some key agencies
• 8(a) and set-aside contracts
• Less attractive service offerings
• IT staffing, facilities management, etc.
• Mainly subcontractor positions
• Commodity type services
• Few cleared employees
Valuation Drivers
CYBERSECURITY
BIG DATA
CLOUD COMPUTING
HEALTH IT
MOBILE
SIGINT
Everything Else
Funding environment creates “haves” and “have-nots”
Many buyers are pursuing key areas
• Drives valuations higher
Funding uncertainty diminishes buyer
interest in non-key areas
Key Areas
10x
C4ISR
Preparing for the Future
Valuation Bifurcation
• 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 space
Preparing for the Future
/
Private Equity and Private Equity-Backed Companies
Foreign-Owned / Foreign-Owned with U.S. Subsidiary
Large Public Firms
• Need acquisitions to supplement slow organic growth
• Large cash reserves
• More discriminating than in the past
• Less active than in recent years
• European economic crisis
• Currency fluctuations
Trends in Buyer Environment
Preparing for the Future
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
Discriminating Buyers
I Current Environment
II Demographics
III Financial Ratios
IV Indirect Rates
V Preparing for the Future
VI Creating Value
Agenda
Creating ValueValuation
•Type of work•Contract mix•Customer intimacy
Culture
•Strategic value•Management team•Infrastructure
Determine what is important for the shareholder, and grow the company to build value in that area
Begin With the End in Mind
Creating Value
The Obvious
Contract Management
Financial Management
Processes
Intangibles
Creating Value
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
Contract Management
Creating Value
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
Processes
Creating Value
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
Financial Management
Creating Value
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
Intangibles
Current Environment
Questions
SC&H Group, LLC
Operational Financial Strategic
Regulatory Compliance Contract Pricing Strategic Consulting
FAR and CAS Consulting DCAA Audit Support Contract Compliance System assessments and certification
Forward Pricing Rate Development Contract Pricing and Negotiation Contract Changes and Claims Contract Billing
Strategic Growth Planning Organizational Development Change Management Executive Mentoring Executive Compensation Business Performance Management
Operations Infrastructure Corporate Finance Transaction Advisory
Cost Allocations Cost Allowability Indirect Rate Structures Disclosure Statement Preparation Incurred Cost Submissions
Financial Analysis and Modeling Market Analysis Risk Management Assurance Services Corporate Tax Services Valuations Locations, Credits and Incentives
Growth Capital Mergers and Acquisitions Management Buyouts Capital Raise (Debt/Equity Recap)
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