What's on Parsons' 2020 agenda with its IPO in the rearview mirror

Parsons Corp.’s return to the public markets is now 10 months in the rear view mirror and one of the company’s goals in doing that was to raise new capital from investors to fund acquisitions.

Both that focus and the search for deals fitting within it do not appear to be changing much in Parsons’ first full year of its second act as a publicly-traded company.

During Parsons’ fourth quarter earnings call Tuesday, CEO Chuck Harrington told investors he and the management ream are reviewing the pipeline of potential acquisitions on a weekly basis and talking to those businesses regularly.

“The core techs we are looking for are artificial intelligence, autonomous, cloud computing and (Internet of Things),” Harrington said. “The good news is there are a lot of good companies out there of various sizes and configurations. We’re really continuing to focus on higher margin, higher growth companies that have a fair amount of (intellectual property) in either software or hardware products and are mission focused.”

In essence, think of another deal like Parsons’ most recent three: Polaris Alpha in 2018, followed by both OGSystems and QRC Technologies last year. The QRC deal came nearly two months after Parsons' initial public offering.

Those were centered around markets Harrington identified to analysts as priority areas for the federal government even with expectations of the federal fiscal year 2021 defense budget not growing much versus in prior periods. Think within that space, cybersecurity, missile defense, intelligence, geospatial and hypersonics.

“Although the top line may be flattish, we think that underneath that there are areas that are growing and we think we’re positioned in those,” Harrington said, while other areas “may be trimmed in order to maintain the growth of these areas the nation views as higher risk.”

What Parsons is doing to prepare itself for possible disruptions due to the ongoing coronavirus outbreak also was on the agenda for analysts asking the questions during the call. About 3,600 of Parsons’ 16,000 employees have security clearances, which means access to a so-called “SCIF” (sensitive compartmented information facility) is a must in order to perform classified work.

Harrington said those employees split their time between company and government facilities, so there is “some flexibility in moving back and forth.”

“Our project teams are working with our customer teams to look at workarounds should SCIFS be closed for any reason, as well as what we can do from home,” Harrington said.

The main question in that discussion is if there are areas “of classified work that can actually be conducted in an unclassified facility, with the final work having to be done within a SCIF,” he added.

Centreville, Virginia-based Parsons has the balance sheet runway to move on deals. Its debt leverage ratio at last year’s end stood at 0.2 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Publicly traded government IT and services companies typically max out that ratio at 3.5 times adjusted EBITDA. They can go higher at times however: Science Applications International Corp.’s will be at 4.5 after it closes the acquisition of Unisys Federal and Leidos will be at 3.7 after the completion of its buy of the L3Harris Technologies airport security technology businesses.

Also on Parsons’ financial front, the company reported revenue growth of 11 percent (4 percent organic) to $3.95 billion last year. This year’s sales guidance came out to $3.95 billion-$4.05 billion, which signals expectations of slower organic growth but also attributable to some anticipated runoff of legacy contracts. Parsons’ trailing 12-month book-to-bill ratio was 1.1 however, which shows the backlog grew slightly faster than sales were booked against it.

Based on the guidance’s midpoint, Parsons sees 51 percent of its revenue this year coming in its federal solutions segment compared to 48 percent last year. Federal solutions is one of two reportable segments alongside critical infrastructure.

Parsons expects to record $330 million-$360 million in adjusted EBITDA this year versus the $325 million posted last year, the latter of which grew by 32 percent compared to 2018. Last year’s adjusted EBITDA margin climbed by roughly one full percentage point to 8.2 percent for 2018.

Harrington told analysts he believes Parsons remains on track to hit a 10-percent margin by 2022, a three-year target the company set as part of its initial public offering.