How 'AEC' firms make their GovCon presence known

Parsons Corp.'s process to go public illuminates how they and other "Architecture, Engineering and Construction" firms have found their footing and then some in the government services landscape.

Parsons Corp.’s ongoing process to become a public company not only helps tell their story individually but also how they and their peers have gained a foothold in government contracting.

This group of companies in the realm of “AEC” -- short for architecture, engineering and construction – have emerged in the last decade as federal market players to watch and partly through what has looked like one significant acquisition after another.

Market analysts I spoke with see AEC firms as moving into territories traditionally fenced off by federal systems integrators through acquisitions -- but also by taking away market share for IT and professional services work with agencies.

The "AEC" group including AECOM, Jacobs Engineering Group, KBR, Tetra Tech and Parsons have to varying degrees re-invented their government businesses from what they were before since the U.S. force withdrawals from Afghanistan and Iraq. But analysts said AEC firms’ work during those conflicts there did help them develop the core competency to win contracts.

“As those two wars have drawn down and with budget pressure, logistics, architecture and engineering services have gotten a lot of downward pressure, both on the overall budget as well as labor rates and price,” said Arun Sankaran, partner at public sector IT consulting firm 202 Group. “You can see this expansion into other services, particularly IT and technology-enabled professional services where there’s been less pressure on rates, especially post-sequestration.

“That allows them to upscale into new labor categories which are in demand by the government but also leverages their core competencies in the blocking and tackling of government services, in terms of identifying and winning work.”

The AEC group’s emphasis on government technology and professional services is also a means to diversify their revenue mix and have a more predictable sales cycle versus that of more volatile commercial markets, particularly the energy sector.

Wall Street has noticed the AEC group’s shift in the last five years, said Lucy Guo, a Cowen & Company equity research analyst who specializes in government services. Guo covers Jacobs and KBR for the investment bank.

AEC firms “have more consistent revenue, margins and cash flow generations” from federal work, Guo said. “They have pretty much a single end customer in the U.S. government, which is very reliable in its payment of bills.”

“The general health of the government services sector in terms of revenue growth potential, bookings, metrics, cash flow, free cash flow conversion and in turn free cash flow yields look appealing to investors,” Guo added.

Based on their latest annual “10-K” regulatory filings, here are how the aforementioned four publicly-traded AEC firms plus Parsons break out revenue from U.S. federal work:

  • AECOM: 23 percent, or $4.7 billion, out of $20.1 billion
  • Jacobs: 23 percent, or $3.4 billion, out of $15 billion
  • KBR: 53 percent, or $2.6 billion, out of $4.9 billion
  • Tetra Tech: 33 percent, or $973.4 million, out of $2.9 billion
  • Parsons: 41.5 percent, or $1.5 billion, out of $3.5 billion

Many of the decade’s most significant acquisitions by those AEC firms have included a federal technology and professional services component. AECOM significantly moved its needle of government market scale in the 2014 purchase of URS Corp.

Jacobs Engineering Group’s most recent big-ticket acquisition that touched government services was of CH2M Hill last year, but the company has also been active in tuck-in deals too that added technology work.

Jacobs’ buy of the former Verizon Federal Network Systems business in 2014 brought defense and intelligence telecommunications work, while the purchases of Van Dyke Technology Group three years ago and of Blue Canopy Group last year added cyber and data analytics services.

KBR has built an entirely new government business with a heavy space emphasis through three acquisitions in the past three years, more recently of Stinger Ghaffarian Technologies last year. Tetra Tech just this month acquired eGlobalTech and in 2016 purchased Indus Corp. to incorporate data analytics in water resource management.

Sankaran highlighted KBR’s deal for SGT and Parsons’ buy OGSystems in January as key examples of how AEC firms are positioning themselves. SGT brought to KBR a pool of IT systems engineers and OGSystems brings Parsons into the fold of intelligence analysis.

“What I see is a doubling down of moving from a physical infrastructure world to building a network and data infrastructure, which is the foundation to a lot of higher-end IT and intelligence analysis-type work, he said.

But acquisitions are not the only way to grab market share. Guo pointed out that Jacobs is an example of a company that has been able to throw its weight around and unseat longtime incumbents in the past few years.

Jacobs in March won a $785 million Army training services contract previously held by Raytheon. That followed a trio of takeaway wins over system integrator incumbents in the past two years, including a $4.6 billion Missile Defense Agency IT contract once held by Raytheon.

AECOM last year won new work in a $961 million Air Force unmanned aircraft services contract. In 2017, AECOM secured its role on a $3.6 billion Air Force range support contract once held by PAE.

While KBR certainly built a sizeable NASA business through its acquisitions, KBR is also in a head-to-head showdown with incumbent Peraton for an almost $1 billion to run one of the agency’s main near-Earth and space communications networks.

Peraton has held that work since 2011, including through a series of spinoffs that created the company as it is known today.

But a KBR win of the so-called “SENSE” contract would give their government business a 5-percent revenue run rate boost and also help raise margins as well, Guo said.

Given SENSE’s nature as higher-end commercial satellite support work, Guo added a KBR win would also mean “their space franchise would be viewed more favorably.”