Parsons lays out its three-year blueprint

When Parsons Corp. undertook its initial public offering two years ago, the company showed more of its hand on both the growth strategy and continued evolution of the business.

That has meant walking away from some contracts Parsons calls “low margin, high pass-through” in a push to trade those sources of revenue for others at the higher end markets the seven-decade-old company wants to be a bigger player in.

“Cyber, space, C5ISR and connected communities are the markets that we see transforming through the use of artificial intelligence and machine learning, digital transformation including cloud migration, and the IoT (Internet of Things), predominantly sensors,” CEO Chuck Harrington said in opening remarks during Parsons’ first-ever investor day on Thursday.

“These same markets are also growing due to increased cyber incidents and threats, the new space race and the growth of intelligent infrastructure and connected communities that are leveraging advances in 5G and the need to monitor systems autonomously with AI (artificial intelligence) and other digital tools.”

One potential counter-dynamic to that is an expected overall flattening budget environment and particularly the Defense Department’s portion of it with deficits climbing even higher given the trillions in coronavirus relief spending and elsewhere.

Harrington indicated Parsons has that and all the variating forecasts in mind -- whether the budgets go slightly up, stay roughly flat or tick somewhat downward. But he also told virtual attendees the larger question is where in the budget those changes will happen.

“We have our suspicions of where they'll likely occur, (but) we just don't see them occurring in cyber we don't see them occurring in space, and we don't see them occurring in our missile defense work nor really in the health care work that we're doing or the work related to health care and our engineered solutions,” Harrington said.

Centreville, Virginia-based Parsons’ blueprint is to grow revenue between 5 and 7 percent organic over the next three years, following a 2020 that ended with $3.9 billion in sales. That puts the sales target at between $4.8 billion and $4.8 billion by 2023.

The planned run-off of pass-through revenue should also conclude this year, which is also one Parsons and pretty much everyone hopes starts to see the coronavirus pandemic no longer be such. Chief Financial Officer George Ball said the company saw $200 million of COVID-19 headwinds in 2020 and sees half of that amount continuing into this year.

Baked into that is the push to grow its federal solutions segment from $1.9 billion in revenue last year to $2.4 billion by 2023. Federal solutions is one of two reportable segments for Parsons alongside critical infrastructure.

Many of the prongs in Parsons’ strategy and particularly in the federal market remain very similar -- pursue larger contracts of longer durations with a high technology component and invest in intellectual property for hardware and software products.

So too is the lever of mergers and acquisitions to augment those organic growth thrusts. Parsons’ ideal pace on closing M&A deals is one or two per year, Harrington said.

Parsons’ most recent deal was for Braxton in the fall of last year to add more capabilities for enterprise ground systems that support space operations. That was preceded by the purchases of QRC Technologies in 2019 and Polaris Alpha in 2018.

“As we have completed our acquisitions and made our R&D investments, we've moved into markets we've never been in before from our radio frequency sensors to enterprise ground systems for space to the offensive and defensive cyber capabilities of Polaris Alpha including AI,” Harrington said.

M&A is also one area that Parsons has specific financial characteristics it continues to prioritize -- companies with growth of at least 10 percent on the top line and generating at least 10 percent EBITDA margin (earnings before interest, taxes, depreciation and amortization).

The margin piece of Parsons’ M&A focus feeds into the company’s longer-term strategy of expanding its bottom line to between 9.2 percent and 9.4 percent adjusted EBITDA by 2023 and eventually to 10 percent. Parsons ended last year with an adjusted EBITDA margin of 8.7 percent.