Peraton Corp.

The stable outlook reflects our expectation that Peraton's leverage will decrease quickly after the separation from Harris and acquisition of SRI. However, while we expect credit ratios to improve over the next 12-24 months with earnings growth and debt repayment, we do not expect debt to EBITDA to go below 5x for an extended period due to the likelihood of further dividends or debt-financed acquisitions as a result of its ownership by a private equity sponsor. We could lower the rating if earnings do not improve as expected, keeping debt to EBITDA above 7x at the end of fiscal 2019. This could also be the result of a debt-financed acquisition or, less likely, a dividend. The company's ownership by a

...Earnings, which were weak in 2018 due to one-time costs, should significantly improve in 2019. In fiscal year 2018 (ended Dec. 31), Peraton Corp. faced one-time costs associated with the recent acquisition of Strategic Resources International (SRI) and continued costs pertaining to the separation from Harris Corp. Approximately $30 million in nonrecurring charges for the year resulted in S&P Global Ratings-adjusted EBITDA margin of only 5.4% in 2018. We expect EBITDA margins to improve to 10%-11% in fiscal 2019 due to the absence of these costs and a shift to higher-margin work. Margins should also benefit from customers shifting away from "lowest price technically acceptable" type contracts, which generally have very low margins. The acquisition of SRI improved the variety of capabilities the company can offer its customers. While Peraton originally focused more on satellite and terrestrial communications, SRI adds global mobile communications abilities. With broader services, more customers...

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