6
2013 Year in Review
2.1x
2.3x
1.9x
1.3x
1.4x
1.3x
1.6x
$37.6
$42.5
$36.1
$29.8
$35.9
$41.4 $40.0
$
$
$
$
$
$
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
Average Debt/ LTM EBITDA
Total Industry Debt
Snowden, Intel Budget, and Changing Capital Structures
Source: Public Filings; Capital IQ as of 12/31/13
2013 Intel Budgets
$14.7
$10.8
$10.3
$4.9
$4.4
$3.0
$2.8
$1.7
CIA
NSA
NRO
NGA
DIA
DOJ
Other
ODNI
$52.6 Billion
Total
Total Industry
1
Debt and Median Leverage Multiples
Booz Allen Hamilton technician Edward Snowden’s leak of top-secret NSA
documents to
The Guardian
newspaper was likely the most publicized
event of 2013’s first half. Snowden's disclosures have accelerated
Intelligence Community (IC) security reforms and provided unprecedented
insight into IC budgets. The CIA has begun consolidating databases and
has eliminated 90% of its system administrators. These changes relocate
data from separate repositories into large data centers and reduce the
number of individuals with access to secret information. As a result of
Snowden, further insights into IC budgets and strategic positioning are also
available (2013 breakdown displayed in the chart to the right). Despite
Snowden’s transgressions, the IC remains among the most coveted of
customers for contractors. Acquisitions of IC contractors are expected to
remain strong with well positioned companies that will continue to command
premium valuations.
Another interesting industry trend during 2013 was the increase in company
debt levels. From 2007 - 2012, industry debt to LTM EBITDA leverage
multiples remained consistently low (about 1.3x industry average). Based
on analysis of historical averages, it can be argued that the industry as a
whole was under-levered and thus not operating at an optimal capital
structure. However, during 2013 the average industry multiple increased
substantially for the first time in over a decade. The availability of cheap
debt is undoubtedly a driving factor of this trend; however, as budgetary
clarity increases, one would expect the industry to continue reverting back
to higher levels of leverage. The most common way under-levered
companies add debt is through an acquisition, thus rightsizing the capital
structure of the combined entity. As a result, debt financed industry
consolidation (e.g. Engility’s acquisition of Dynamics Research and CACI’s
acquisition of Six3) could continue to increase in 2014 as companies shift
further towards optimal capital structures.
(In billions)
1
BA, GD, LMT, NOC, RTN, LLL, CUB, FLR, HRS, TDY, CACI, LDOS, MANT
