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Edited Transcript of PSN.N earnings conference call or presentation 13-Aug-19 12:00pm GMT

Q2 2019 Parsons Corp Earnings Call

Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Parsons Corp earnings conference call or presentation Tuesday, August 13, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Spille

Parsons Corporation - VP of IR

* Chuck Harrington

Parsons Corporation - Chairman & CEO

* George Ball

Parsons Corporation - CFO

* Carey Smith

Parsons Corporation - COO

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Conference Call Participants

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* Sheila Kahyaoglu

Jefferies LLC - Analyst

* Cai von Rumohr

Cowen and Company - Analyst

* Matt Sharpe

Morgan Stanley - Analyst

* Tobey Sommer

SunTrust - Analyst

* Gavin Parsons

Goldman Sachs - Analyst

* Justin Donati

Wells Fargo - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jack and I will be your conference operator today. At this time I would like to welcome everyone to the Parsons second-quarter 2019 earnings conference call. (Operator Instructions). Thank you. Dave Spille, Vice President of Investor Relations, you may begin your conference.

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Dave Spille, Parsons Corporation - VP of IR [2]

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Thank you. Good morning and thank you for joining us today to discuss our second-quarter 2019 financial results. Please note that we provided presentation slides on the Investor Relations section of our website.

On the call with me today are Chuck Harrington, Chairman and CEO; George Ball, CFO; and Carey Smith, Chief Operating Officer. Today Chuck will discuss execution against our corporate strategy. George will provide an overview of our second-quarter financial results, and then Carey will review our operational highlights. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the Company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our registration statement on Form S1 and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements.

Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now I will turn the call over to Chuck.

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Chuck Harrington, Parsons Corporation - Chairman & CEO [3]

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Thank you, Dave. Welcome to Parsons' second-quarter 2019 earnings call. We had a strong quarter as we continue to deliver solid revenue growth, expand margins and leverage our strong balance sheet for organic and inorganic strategic investments. We received notable recognition for our corporate social responsibility initiatives.

Financially we delivered strong second-quarter results, which included revenue growth of 10% including 6.4% organic growth in Federal Solutions, adjusted EBITDA growth of 45%, a 190 basis point improvement in our adjusted EBITDA margin to 7.7%, total backlog growth of 10%, a trailing 12-month book to bill ratio of 1.2, and an increase in our Federal Solutions revenue mix to 48% from 38% in the same quarter of last year.

As we previously announced, we closed on the acquisition of QRC Technologies on July 31. This important acquisition is consistent with our strategy of acquiring high-growth defensive security product oriented technology companies. QRC will enhance our capabilities, margins and revenue growth profile and allow us to deliver integrated solutions to our customers.

QRC fits squarely within our Enhance, Extend and Transform strategy and meets all of our financial and strategic criteria. QRC enhances our margins and revenue growth given our exceptional EBITDA margins of around 30% and robust revenue growth in the mid-20% range.

QRC also extends our capabilities and customer base with the special operations command and intelligence communities, as well as with the Navy and Marine Corps, which enables us to augment our existing solutions with QRC's products.

Additionally, we plan to leverage Parsons' artificial intelligence and data analytics capabilities into QRC's offerings to expedite the creation of actionable intelligence for our customers.

This transaction is also consistent with our Transform strategy to build our technology and transactional revenue streams. QRC increases our presence in the defense and intelligence software and hardware markets with a commercial pricing model, expanding our customer relationships and accelerating revenue growth and margin expansion.

Our M&A strategy has served us well in the integration of our two most recent acquisitions, Polaris Alpha and OGSystems, continue to yield positive results. We have combined our technologies and expertise to increase pursuit sizes and win rates. We've increased employee retention, leveraging our entrepreneurial culture and history, investing in technology and promoting the exchange of talent between our markets and segments.

Polaris Alpha, which just reached its one-year anniversary with Parsons, has exceeded its revenue and cost synergy targets. It also provides us with leading technologies in artificial intelligence, data analytics, cyber security, rapid software and hardware prototyping and cloud migration. This acquisition enables us to win several intelligence community and defense contracts.

OGSystems' performance has also been strong, exceeding both their revenue and profitability targets. We have successfully leveraged this investment to facilitate contract wins with both our Federal Solutions and Critical Infrastructure segments. We've also identified more than 20 additional revenue synergy opportunities and employee retention has been high.

In addition, we continue to invest organically in mission-critical areas. We originally opened our Space Launch Integration Laboratory, a high bay facility in Southern California, where will be providing small space vehicle integration into space launch payloads for the Air Force and other government agencies.

In fact, last week we achieved the first multi-manifest launch integration of a small space vehicle payload carried on the aft bulkhead of an Atlas 5 rocket under a launch manifest systems integrator contract with the Air Force, another big step in Parsons' long history of supporting the US space program.

We now have more than 30 laboratories and six high bay facilities integrated across the United States that are dedicated to advancing Parsons' investments in space, cyber, intelligence, defense and intelligent transportation networks. In addition, we continue our investments in hypersonic threat engineering and analysis and test -- engineering test support of hypersonic vehicle development.

Before I turn the call over to George, I want to acknowledge Parsons' fourth consecutive recognition by STEM Workforce Diversity Magazine as one of the top employers in the country for minority groups, women and people with disabilities working in science, technology, engineering and math.

An example of what drives talent to Parsons is our community service such as our partnership with Bridges to Prosperity. In this past quarter a group of our employees completed their fifth bridge which have connected isolated communities in rural areas of South America and Africa, connecting residents to education, food supplies, medical services and economic opportunity.

We are proud of our corporate social responsibility work and recognition based on the principle that the long-term interests of our organization are best served by improving the economic, socio, cultural and environmental practices within the communities we serve and around the world.

In summary, our second-quarter was a success in terms of our financial results, strategic complements with -- and environmental sustainability and governance initiatives. With that, I'll turn the call over to George to discuss our second-quarter 2019 financial highlights. George?

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George Ball, Parsons Corporation - CFO [4]

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Thank you, Chuck, and good morning, everyone. Today I will organize my remarks into four key areas: the income statement, cash flow results, balance sheet and contract awards. I will also discuss certain financial results on an adjusted non-GAAP basis where we believe doing so provides a meaningful comparison to our prior financial results. In addition, I will elaborate on two items associated with our recently completed IPO which impacted the current quarter's results.

As Chuck indicated, our second-quarter revenue and adjusted EBITDA exceeded prior-year results. Total revenue for the second quarter increased 10% and organic revenue increased 3.2% from the second quarter of 2018.

Indirect SG&A expenses increased $78 million from the second quarter of 2018 due to additional costs associated with acquired businesses as well as $43 million of costs related to legacy cash settled long-term incentive compensation plans, the valuation of which is determined by share price changes.

The incentive compensation expense was driven by the significant increase in our share price since the completion of our IPO. The primary long-term incentive plan which gives rise to this expense will continue through 2020. The most recent awards under this plan were granted prior to the IPO in early 2018 and have been frozen since that time and the Company does not intend to establish any similar plans in the future.

Given the volatile nature of these compensation expenses, these costs are added back to our adjusted EBITDA and adjusted EPS figures in the current quarter and we will continue this practice through 2020 at which time the aforementioned long-term incentive plan will sunset. We believe this will provide investors with more meaningful comparisons of our true operating results.

We also included historical adjusted EBITDA and adjusted EPS tables in our earnings press release to provide additional clarity into these expenses. As noted therein, this same issue results in an increase to our previously reported adjusted EBITDA reconciliations of approximately $3 million to $5 million per quarter.

GAAP EPS for the quarter was $0.44 per share and adjusted EPS was $0.43. Our EPS comparisons are less meaningful this quarter due to IPO transaction costs, the aforementioned long-term incentive compensation expenses, additional shares issued in the IPO, and the establishment of a $56 million deferred tax asset resulting from Parsons' conversion from an S Corp to a C Corporation, which had the effect of reducing the Company's current quarter tax provision by the same amount. For fiscal year 2019 we expect and effective tax rate benefit of approximately 31%.

Total shares issued and outstanding at the end of the second quarter were approximately 99.4 million and are expected to remain relatively constant for the remainder of 2019. Adjusted EBITDA increased 45% to $76 million equating to an adjusted EBITDA margin of 7.7% or a 190 basis point improvement over the prior year period. This margin expansion was driven primarily by an increase in our Critical Infrastructure margin.

Included in our second-quarter total and Critical Infrastructure adjusted EBITDA is $3.3 million of additional equity and earnings that we expected to recognize in the second half of 2019, but which was reported in Q2 due to an earlier than anticipated change order on a major high-speed rail project.

Turning now to our operating segments and starting with Federal Solutions. Second-quarter revenue grew 40% year-over-year. This increase was due to the acquisitions of Polaris Alpha in OGSystems as well as organic growth of 6.4%.

Federal Solutions' adjusted EBITDA grew 5%, but our adjusted EBITDA margin decreased 250 basis points to 7.5%. This decrease was expected given our substantial outperformance in Q2 2018 and is primarily driven by a greater allocation of corporate indirect G&A costs to our Federal Solutions segment in line with its growing share of the overall business.

And now a few words regarding our Critical Infrastructure segment. Second-quarter organic revenue grew 1.2% year-over-year excluding $55 million of revenue recorded in the second quarter of 2018 related to the successful resolution of a nonrecurring legal matter. Critical Infrastructure adjusted EBITDA grew 117% and our margin expanded by 460 basis points to 7.9%.

These increases were primarily driven by higher equity and earnings of unconsolidated joint ventures, including the $3.3 million mentioned earlier was expected to be reported in the second half of 2019, as well as a reduction in the allocation of indirect G&A expenses.

Now let's turn to cash flow and balance sheet metrics. Our net DSO for the quarter was 65 days as compared to 70 days at the end of the second quarter of 2018. The improvement driven primarily by strong cash collections in our Federal Solutions segment.

During the second quarter we generated $12 million in operating cash flow, which was less than expected due to the timing of certain payments, primarily in our Critical Infrastructure segment, which we expect to recoup over the balance of 2019. We continue to expect solid cash flow from operations for the full year in line with or above underlying earnings.

Our second-quarter 2019 balance sheet reflects gross and net debt of $249 million and $46 million respectively. Following the completion of our QRC acquisition, pro forma debt and net debt as of June 30, 2019 were approximately $389 million and $264 million, respectively, leaving us with a pro forma trailing 12-month net debt leverage ratio of less than 1. As a result, we have significant additional borrowing capacity which, along with operating cash flow, enables ongoing investments in our growth strategy.

Turning now to contract awards, we reported contract awards of $978 million in the second quarter, which represents a book to bill ratio of 1.0, a solid performance given our book to bill ratio of 1.4 in the first quarter of 2019 and our trailing 12-month book to bill ratio of 1.2. Total backlog at the end of quarter two stands at $8.5 billion, up 10% from the end of the second quarter of 2018.

With that I will now turn the call over to Carey to discuss some of our second-quarter operational highlights.

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Carey Smith, Parsons Corporation - COO [5]

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Thank you, George. As Chuck and George indicated, we had a strong second quarter across Parsons. We delivered organic revenue growth in both segments and achieved a trailing 12-month book to bill ratio of 1.2 in Federal Solutions and 1.3 in Critical Infrastructure, demonstrating continued growth. Year to date we remain very strong in both segments too with Federal Solutions at a 1.4 book to bill and Critical Infrastructure at a 1.0 book to bill.

Our 6.4% organic grace in Federal Solutions was driven primarily by missile-defense cyber and intelligence work, illustrating that our portfolio is aligned to the national defense strategy and that we are positioned for enduring profitable growth. We also delivered solid overall margin expansion while continuing to invest in our technology and people.

We had key awards across both segments. Second-quarter awards include $147 million of additional scope in our ballistic missiles defense system contracts with the missile-defense agency in key areas including cyber, command and control, foreign military sales, and target and countermeasures.

We won more than $140 million of new contracts for cyber security, software development, data analytics, system engineering and integration, and mission and systems survivability from the Air Force Research Laboratory, Army Cyber, National Geospatial Intelligence Agency, and the Defense Threat Reduction Agency.

We were selected as one of the multiple awardees on the $7.5 billion ceiling DISA Systems Engineering, Technology and Innovation contract, continuing to expand our robust IDIQ and other transaction agreement portfolio.

We were selected to serve as the lead designer for the $1.2 billion Federal Way Link Extension project for Sound Transit in Seattle. Our portion of this contract is currently worth $87 million.

And finally, we were awarded the program management contract for the California Delta Water Conveyance Modernization project, which is a multibillion-dollar water transfer project to improve sustainability and reliability of the water supply for human and environmental uses from the Sacramento River. Our initial contract value on this project is $36 million with significant growth potential over the life of the program.

As Chuck mentioned, our space team is celebrating the successful manifest launch of a small space vehicle payload or a small satellite. This important mission represents the first time that the Air Force Space and Missile Systems Center has separated a small space vehicle payload prior to the anchor payload.

Under our contract we are responsible for performing the launch integration that enables small space vehicle delivery to orbit. This includes evaluating space vehicle and payload options, requirements development, multi-mission carrier procurement, integrated system assembly and test, space vehicle integration to the carrier, and interface compatibility with the anchor payload and launch vehicle.

From the time of our contract award until this first launch was just seven months. This critical launch represents an exciting time for the Parsons space portfolio. We continue to have solid win rates and, as a testament of our strong performance execution, we have a 100% repeat win rate in our Federal Solutions segment this year. In addition, we are the market share leader on the Mohave contract, a $1 billion ceiling IDIQ for the National Geospatial Intelligence Agency.

On the Critical Infrastructure side, as evidenced by our second-quarter sound transit win, Parsons continues to participate in almost every major transit system project in North America and many of the most renowned systems overseas. We deliver world-class rail transit systems for vibrant connected communities.

Our strong customer relationships, our ability to provide differentiated technology solutions to mission-critical challenges, our performance execution, and the investments we make in people, processes and technology have led to great success in winning new contracts, driving contract growth and expanding our margins.

I am very excited about our future. We have a portfolio that's aligned to the national defense strategy. We have a two-year federal budget deal. We have two quarters of solid financial results and our qualified pipeline remains at an all-time high of $20 billion, including more than 30 pursuits valued at more than $100 million. In addition, we have $4.2 billion of outstanding bids awaiting award.

We differentiate ourselves in our core markets by providing innovative, responsive and agile end-to-end solutions. The QRC Technologies acquisition enhances our offerings with their integrated platform that covers the war-fighter signals intelligence mission. The advancement of peer-to-peer adversaries will require monitoring of more types of sensor data and addressing the convergence of signals intelligence in electronic warfare mission sets.

QRC's leadership in radiofrequency technologies, portfolio of operator friendly signals intelligence products, and deep understanding of the unique environment of its customers has positioned QRC as the go-to provider. QRC's customers include the special operation forces, Department of Defense Tactical Signals Intelligence operating units, and the intelligence community.

The product suite scalability, low size weight and power, and ease of use will be beneficial for the broader Parsons defense and intelligence community customers and we can offer QRC's products across our robust portfolio of IDIQ and OTA contract vehicles. We are very excited to add the QRC's differentiated products and signals intelligence subject matter experts to the Parsons team.

To ensure we remain a market leader we continue to invest in our people, processes and technologies. During the second quarter we launched the Parsons FEDNET, which is our collaborative desk set-top software development environment that allows for virtual project collaboration in a secure, agile, standardized and scalable environment.

We also recently announced our Advanced Communities of Excellence program. This program originates and incubates cross-market solutions and technologies, pairing research and development with business needs across all of our markets. The program's initial focus will be to accelerate technology, research and development in areas of artificial intelligence, immersive engineering, and vulnerability research to deliver solutions for pressing customer needs.

And finally, we recently earned our ISO2701 Information Security Management system certification, demonstrating our commitment to operational excellence and world-class information security standards. With that I will turn it back over to Chuck.

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Chuck Harrington, Parsons Corporation - Chairman & CEO [6]

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Thank you, Carey. In summary, in Q2 we delivered solid revenue growth, expanded margins, and continued to invest in our people and technology to further differentiate Parsons in the marketplace. We also continue to transform our business with the acquisition of QRC Technologies. Our strong balance sheet is providing us with the financial flexibility to further invest in our strategy and drive shareholder value. Now we will open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Sheila with Jefferies, your line is open.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [2]

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I wanted to ask about first on the free cash flow. How do you think about the moving pieces for working capital and what's expected to come back in the second half?

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George Ball, Parsons Corporation - CFO [3]

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We expect that we will -- as I noted in our prepared remarks, we will achieve our expectations by the end of the year. The predominant shortfall, as I remarked, is in the Critical Infrastructure segment and it really narrows down to about four particular customers, so it's all out of accounts receivable working capital.

One of those customers is in the Middle East, three in North America and, in terms of dollars, they are about equally balanced. We expected those to be collected in Q2. Three of those we anticipate will be collected in Q3. The Middle East account has already been collected in large part and one of the North America accounts we expect in Q4.

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Sheila Kahyaoglu, Jefferies LLC - Analyst [4]

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Got it, thank you for the color. And then you called out missile defense as well as hypersonics in your prepared remarks. The latter has been getting a lot of focus in the press. Can you talk about what you're seeing on the services side? Are there any opportunities yet for hypersonics?

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Chuck Harrington, Parsons Corporation - Chairman & CEO [5]

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Yes, let me start off with that and then I'll have Carey take that. We look at hypersonics from two perspectives, Sheila, hypersonics and anti-hypersonics. And we've been doing work in missile defense area anti-hypersonics for some time. And we believe that that work will continue as the threat continues to evolve and expand. And this is an area of increasing services going into the future. Carey, anything you would like to elaborate?

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Carey Smith, Parsons Corporation - COO [6]

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Sure, as Chuck pointed out, the United States needs both offensive and defensive hypersonics capabilities. Both China and Russia have been pursuing hypersonic missiles and are currently driving at quite a fast pace. When we look at this we've been engaged in counter hypersonics work for over 10 years, including hypersonic threat representation and assessing different threat defeat solutions.

Our current engagement is supporting Missile Defense Agency where we provide architecture analysis to defend against hypersonic threats, including both sensor and defeat alternatives. And then for our Space and Missile Defense Command we are also providing engineering and test support for the development of offensive hypersonic flight vehicles.

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Operator [7]

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Cai von Rumohr, Cowen and Company.

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Cai von Rumohr, Cowen and Company - Analyst [8]

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Yes, thanks so much and nice operating results. So, to go back to cash flow, of the four customers who were light, how much was the shortfall in total?

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George Ball, Parsons Corporation - CFO [9]

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The shortfall in total was about $35 million and it's split about equally between the single Middle East client and three in North America.

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Cai von Rumohr, Cowen and Company - Analyst [10]

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Got it. And I believe -- I mean, you said that you expect free cash flow to exceed underlying earnings. I believe your prior target was about $245 million in free cash flow for the year. Is that achievable because that looks like it would require a pretty aggressive hockey stick in the second half?

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George Ball, Parsons Corporation - CFO [11]

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Yes, it is definitely a significant increase in the second half, but we do believe it is achievable. We have line of sight into the specific accounts I mentioned which caused the shortfall in Q2. And we have a long history of significant cash flow strengthening in the second half. So, we remain confident that we will achieve that target.

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Cai von Rumohr, Cowen and Company - Analyst [12]

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Got it. And then in terms of DSOs -- and this is the last one -- you were 65 days. Do you feel you can get that number down by year-end?

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George Ball, Parsons Corporation - CFO [13]

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Yes. We believe we'll be around 60, and this is net DSO, net of accounts payable and project accruals. We believe we will approach 60 by year-end.

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Operator [14]

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Matt Sharpe, Morgan Stanley.

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Matt Sharpe, Morgan Stanley - Analyst [15]

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Good morning and nice quarter. I was just curious, so in your prepared remarks you mentioned some investments in space facilities and other infrastructure. And just looking at the CapEx trend over the last few quarters, it steadily risen as a percentage of revenue here. You guys have traditionally trended below 1%, but I think for the quarter you are up to 1.5%.

Given the pivot of the portfolio to more solutions or somewhat product oriented offerings, how should we think about the profile going forward here? Is it going to continue to gravitate upward or should it normalize back down towards the 1% or so level?

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George Ball, Parsons Corporation - CFO [16]

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I would say short-term it probably will run a little bit higher for the reasons you mentioned. In addition to that, we have also had a cycle currently of a number of significant office leases coming up for renewal. In a few cases we were actually in the process of relocating, which has resulted in a bit more tenant improvement capital expenditures.

And then in addition to that, we are also ramping up the implementation of a human capital management system, which has also increased capital additions recently. But longer-term 1% is a good model. As revenue grows the number will be higher, but that is -- number of relationships to revenue is a good number.

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Matt Sharpe, Morgan Stanley - Analyst [17]

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Great and then just turning to M&A for a moment, given the QRC acquisition, could you just provide a little bit of color in terms of the pipeline, what you see from here? Is there a pause in integration period? Or should we more think about it as steady as she goes and you guys will continue to be opportunistic in that sense?

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Chuck Harrington, Parsons Corporation - Chairman & CEO [18]

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I think I would look at it as steady as she goes. As we mentioned in the past, we are looking for companies like QRC and companies that have greater than 10% revenue growth margins, accretive in 18 months, companies that we have relationships with already. So in that regard, we have existing relationships with companies and we will continue the pace at about the same level that you've seen over the last 18 months.

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Operator [19]

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Tobey Sommer, SunTrust.

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Tobey Sommer, SunTrust - Analyst [20]

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I was wondering if you could describe the Company's qualified pipeline and other forward indicators and contract activity that you're tracking and how it distributes between the two businesses, where the pockets of the greatest strength are and where the opportunities could use some improvement. Thanks.

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Carey Smith, Parsons Corporation - COO [21]

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Sure, our total qualified pipeline is over $20 billion. Our pipeline in total is over $30 billion; $20 billion would be a number that we plan to pursue. The majority of the pipeline and the larger pursuits are in the Federal Solutions segment. When I cite 30 pursuits that are over $100 million, almost all of those are in the Federal segment. The specific market areas still include Cyber, also electronic security systems, cloud computing, and we do have some in the engineered systems area.

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Tobey Sommer, SunTrust - Analyst [22]

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From a culture and employee morale standpoint, how would you describe the last handful of months during and since the IPO process? And if you could include a comment on the retention of your employees in recent acquisitions? Thanks.

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Chuck Harrington, Parsons Corporation - Chairman & CEO [23]

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I think anytime you go through a change like we did there's some apprehension going in. The morale since the IPO has been very high. Our retention rates are above historical averages for us. We've got a lot of exciting things going on and a lot of investment in the areas that are creating a truly differentiated offering and that creates an exciting place to work.

Combine that with the environmental, social and governance and sustainability items that we're working on, and I would describe our workforce as motivated and ready to continue to work for our customers' missions.

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Tobey Sommer, SunTrust - Analyst [24]

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Thanks. I wanted you to elaborate on one of the other previous questions with respect to acquisition targets and how you mentioned that in many cases these are partners of yours on contracts that you then end up acquiring. On average historically how long have you had your acquisition target that is working partners prior to deals?

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Chuck Harrington, Parsons Corporation - Chairman & CEO [25]

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I think if you look on average it has been over a year, in some cases several years that we've worked together and got to know each other and see that the cultures are aligned, the vision of where we believe the markets are going are aligned.

Our focus on customers are aligned and we each have faith and confidence in each other's ability to share technologies, resources and bring -- and in our case we bring often their capabilities to our contracts. And often times there's opportunities for them to bring our capabilities to their contracts. So, that generally takes us a while. So, to that extent we always have a pretty robust pipeline of opportunities that we are looking at at any given point in time.

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Tobey Sommer, SunTrust - Analyst [26]

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And if I could sneak one last one in -- does the decline in interest rates at all change your -- the way you think about leverage, your appetite for acquisitions? Thank you.

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George Ball, Parsons Corporation - CFO [27]

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I would say not really. Interest rates have been so low historically for a long time. Borrowing money is a bargain, so I don't really think that changes our outlook. From the standpoint of our leverage ratios, we still are comfortable at 2.5 to 3 times and I would not change that.

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Operator [28]

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(Operator Instructions). Gavin Parsons, Goldman Sachs.

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Gavin Parsons, Goldman Sachs - Analyst [29]

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I wanted to get a -- how you think of the math of book to bill translating to revenue growth specifically in Federal Solutions? Just with the 1.2 times the last 12 months, it was 1.2 times for 2018, 1.2 times for 2017. So, following that 1.2 in 2017, I think you grew somewhere in the vicinity of 10% organic in 2018. You're tracking up out of the mid-single-digits so far this year. So, how does that 1.2 over a long period of time translate into revenue growth going forward?

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Chuck Harrington, Parsons Corporation - Chairman & CEO [30]

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It varies, Gavin, but the way we look at it, some of that we'll see in the next 12 months revenues, and some of that is resulting in a firming up of out-year revenues. So, as our forecasts that we do internally, we are at pretty much an all-time high as it relates to not only the amount of current year and subsequent year revenue fulfillment already into our plan, but also getting a pretty large percentage of 2021 and 2022 starting to fill up the bucket.

So, most of these contracts are multi-year, and so they have probably a two- to three- to four- to five-year tail on them and that's the way we look at it. Maintaining our growth in the upper single-digits is -- continues to get firmed up.

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Gavin Parsons, Goldman Sachs - Analyst [31]

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Got it. And then on Federal Solutions' margins, up only a little bit year to date despite the inclusion of Polaris Alpha and OG. I know you mentioned more allocation of corporate overhead to the segment, but maybe if you can talk about some of the moving pieces there that would be great.

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Chuck Harrington, Parsons Corporation - Chairman & CEO [32]

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In summary, the operating margins of our Federal Solutions continue to increase. As we said, as Federal Solutions becomes the bigger component of the overall Corporation that obviously -- it then consumes a larger portion of corporate G&A. And now it's nearly 50% of the Company.

And we are seeing strong performance of our portfolio. We continue to run off contracts of lower margin or higher pass-through costs that tend to drive down margins. We'll continue to do that over the next 24 months. And we still are on target to reach our double-digit EBITDA margins for the Corporation in three to five years.

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Gavin Parsons, Goldman Sachs - Analyst [33]

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Great, then one last one if I could. You mentioned you're pursuing larger contracts there. I imagine that's both a function of customer footprint and past performance, so (inaudible) added acquisitions. But is there also a benefit of scale where now you're able to leverage across the business or the customer sees you as a bigger entity and thus able to work on bigger contracts?

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Carey Smith, Parsons Corporation - COO [34]

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Yes, I would say it's scale but it's scale really from a perspective of how we've put the portfolio together. Through the acquisitions we've been able to drive end-to-end solutions, so we've been very careful about the companies we are acquiring. For example, if I look at cyber, Parsons was very strong in areas like high-speed processing and network visualization, but we didn't have as much competency in data analytics or artificial intelligence.

So, by adding Polaris Alpha that put that into our portfolio. Then OGSystems brought the geospatial intelligence and most recently QRC brought the RF technologies. So, I would say before we were going after smaller contracts; today we can go after very large contracts because we cover the customers' broader mission portfolio.

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Gavin Parsons, Goldman Sachs - Analyst [35]

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Great, thanks.

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Operator [36]

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(Operator Instructions). Edward Caso, Wells Fargo.

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Justin Donati, Wells Fargo - Analyst [37]

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This is Justin Donati on for Ed. Thanks for taking my questions. The first one I had, just given QRC's 30% plus EBITDA margins, can you talk about the step-up in margin in both the Federal segment and the overall business that that provides?

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George Ball, Parsons Corporation - CFO [38]

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Yes, this is George, I'll take that. The margins in the QRC business are 30%, actually a little bit higher. But it's a fairly small revenue platform. Just to give you a frame of reference, we anticipate over the balance of this year we'll probably generate about $22 million in revenue and about $7 million in adjusted EBITDA.

So, while it is a very positive acquisition from that standpoint, the impact on 2019 will be highly diluted. Long-term though I think it really points to a great opportunity as we continue to expand not only that business but our product oriented business in the rest of the Federal Solutions segment.

So, it's really at this point an incredibly exciting strategic acquisition which points to margin expansion in the future. But the quantitative impact on this year will be largely diluted just given the size of the overall business.

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Justin Donati, Wells Fargo - Analyst [39]

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Okay, thanks for the color there. And then kind of my follow-up question, I know you're not providing guidance at this time, but could you talk about any headwinds or tailwinds to revenue in 2020 relative to 2019? Have there been any large re-compete contracts that you may have lost or have been in some significant takeaways that you've won this year?

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Chuck Harrington, Parsons Corporation - Chairman & CEO [40]

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When we look at first from the headwind perspective, there's no obvious headwinds that we see to our book of business on either Federal Solutions or Critical Infrastructure, nothing's changed that would give us a more lower view into the future.

On the tailwinds side, having a federal budget in place, although there's still need for the funding bills to be there, having the budget intact is very much a positive. It gives our customers a lot more confidence that there will be money available to award. And we have had some large takeaways and, Carey, you might want to go into a couple of those.

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Carey Smith, Parsons Corporation - COO [41]

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Sure. Just to expand on what Chuck said, we also do have a 100% re-compete win rate within Federal Solutions, which I would credit to our pro forma execution. Customers continue to come back and continue to renew our contracts.

For the market share takeaway, we've done a very good job on a lot of the IDIQs and across our entire portfolio. Specifically a great example is on the Mohave contract where we are awarded two of the functional areas and we are the leader in both functional areas; despite the fact that there are five awardees we've won the majority of the work.

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Justin Donati, Wells Fargo - Analyst [42]

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All right, thank you for the color. I appreciate it.

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Operator [43]

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And that's all the time we have for questions. I would now like to turn it back over to Dave Spille for closing remarks.

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Dave Spille, Parsons Corporation - VP of IR [44]

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Thank you for joining us this morning. If you have any questions, please don't hesitate to give me a call. We look forward to speaking with many of you over the coming weeks. And with that we will end today's call. Have a great day.

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Operator [45]

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This concludes the Parsons second-quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.