Note to the White House: Wall Street is watching
- By Adam Mazmanian
- May 09, 2017
After signing an appropriations bill that sees the federal government through to the end of September, President Donald Trump is getting set to release his administration's budget request for fiscal year 2018. As forecasted in the "skinny budget," that request is expected to tilt away from domestic spending and foreign aid, and toward more spending on defense, homeland security and services for veterans.
At the same time, the pace of subcabinet appointments and confirmations trails that of other modern presidential administrations, leaving some agencies without decision makers in key roles. Taken together, that combination of empty seats and uncertain priorities is starting to trouble federal contractors -- to the point that it's being raised in corporate earnings calls.
Leidos chairman and CEO Roger Krone alluded to the risks in a May 4 earnings call. Leidos, which since its combination with the IT business of Lockheed has become the largest player in the federal IT space, has customers across the federal enterprise.
"We have seen more slowness than we expected in the acquisition organizations of our customers, due in part to the slow pace of executive leader appointments and budget uncertainty," Krone said.
"This has had two primary impacts, in our view," he said. "First is a delay in the procurement process. Award decisions and procurement deadlines have been slipping to the right. Second, as a result of this, in many cases, the incumbent work related to those awards has been extended. The combination of these has resulted in extensions to our current work, and these are generally shorter in duration and lower in magnitude than new awards, and have decreased backlog from what we expected."
Krone noted that the Department of Defense in particular didn't have any confirmed Trump appointments other than Secretary Jim Mattis, and that a NASA administrator had yet to be named.
"And so the civil servants, these are really great individuals, are doing the best they can to operate the government with the authorities that they have," he said.
The view of the federal market depends on where you sit, said Alan Chvotkin, executive vice president of the Professional Services Council, which represents government contractors.
"What this reflects is proof that the market is very diversified – not monolithic. It varies by activity, program and agency," Chvotkin told FCW. There are some programs where contracting is "business as usual until told to do otherwise," he said. "Other agencies are not going forward for fear of making a mistake," he said.
"Some companies think they're in a strong position vis-à-vis their customers and their market place, and see no diminution of business opportunities," Chvotkin said. "Others who are more heavily engaged in EPA and [other agencies slated for cuts] are understandably more nervous, both on the programmatic side and the contracting side."
Chvotkin said he's seeing the pace of presidential appointments start to pick up and "that period of transition ambiguity is shrinking, for better or for worse, for individual programs and companies."
On the "for worse" side, companies that work extensively with agencies that are slated for cuts are starting to warn investors of the potential downside.
At Maximus, which does social services and health care IT systems support in the U.S. and the United Kingdom, there are deep concerns about the future of the Affordable Care Act.
"Whether or not our U.S. healthcare program, the Affordable Care Act, measure is pushed down to the state, whether they become more state-based, and states move forward with rate waivers is a very important aspect of the healthcare program here in the United States, upon which we are basically sitting here, bated breath and preparing ourselves," Maximus CEO Rich Montoni said in a May 6 call with investors.
In areas where spending is set to contract, Chvotkin suggested that incumbents will still hold an advantage. "It's tough to be in a new entrant into some of these already crowded markets," he said, adding that he expects some increase in mergers and acquisition activity among contractors.
Leidos is less worried about its exposure, even on its civilian-side programs. Krone said, "we don't see even in the skinny budget significant cuts to the agencies that are our primary customers or the departments in those agencies that are our primary customers." The agency also touted 38 awards on indefinite delivery/indefinite quantity contracts in the most recent fiscal quarter, which could yield more than $1 billion in revenue.
As for political appointments, Trey Hodgkins, senior vice president at the IT Alliance for Public Sector, said the current pace "is nothing out of the ordinary for a presidential transition, particularly one between parties." The real problem facing contractors, in his view, is budgeting by continuing resolution.
"Now there's going to be a mad rush to obligate dollars over the next five months," before the current funding bill expires," Hodgkins said, "so agencies do not have to return a bunch of money to the Treasury."
"Sadly, that's become the norm," he said.
Krone, in his comments to analysts, tried to put the best spin on the funding situation.
"Despite coming seven months into the fiscal year, we are optimistic that the passage of these [appropriations] bills should enable an increased level of decision making from the acquisition organizations," Krone said. "This backdrop bodes well for the market areas we are most exposed to and also bodes well, in our view, for what we can expect in fiscal 2018."
Krone also said he expects a continuing resolution at 2017 levels for the start of fiscal year 2018.
Signals from the White House, however, suggest that a "good shutdown" could be in the offing, if the Trump administration's budget priorities aren't embraced on a bipartisan basis. As Sept. 30 approaches, that may well become another topic of discussion among companies and their investors.
Adam Mazmanian is executive editor of FCW.
Before joining the editing team, Mazmanian was an FCW staff writer covering Congress, government-wide technology policy and the Department of Veterans Affairs. Prior to joining FCW, Mazmanian was technology correspondent for National Journal and served in a variety of editorial roles at B2B news service SmartBrief. Mazmanian has contributed reviews and articles to the Washington Post, the Washington City Paper, Newsday, New York Press, Architect Magazine and other publications.
Click here for previous articles by Mazmanian. Connect with him on Twitter at @thisismaz.