Parsons Corporation (NYSE:PSN) Q3 2023 Earnings Call Transcript

Parsons Corporation (NYSE:PSN) Q3 2023 Earnings Call Transcript November 1, 2023

Parsons Corporation beats earnings expectations. Reported EPS is $0.69, expectations were $0.6.

Operator: Good morning, and thank you for standing by. Welcome to the Third Quarter 2023 Parsons Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Dave Spille, Senior Vice President of Investor Relations. Please go ahead.

Dave Spille: Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2023 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results, and a review of our 2023 guidance. 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.

A satellite in orbit, capturing the technological prowess of the aerospace & defense 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 Form 10-K for fiscal year ended December 31, 2022, 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'll turn the call over to Carey.

Carey Smith: Thank you, Dave. Good morning, and welcome to Parsons' third quarter 2023 earnings call. I'm very pleased with our team's performance and our ability to capitalize on the positive tailwinds in both our Critical Infrastructure and Federal Solutions segments. We delivered record quarterly results in total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. We also achieved over 20% organic revenue growth in both segments for the second consecutive quarter, adjusted EBITDA growth of nearly 25%, a double-digit increase in contract awards, and over $200 million in quarterly cash flow for the first time in our company's history. In addition, we closed the strategic acquisition that strengthens our defensive cyber capabilities at a time when accelerating and evolving cyber threats are driving increased customer spending.

As a result of our strong performance and the Sealing Technologies acquisition, we are raising our full year revenue, adjusted EBITDA and cash flow guidance ranges. During the third quarter, we generated total revenue growth of 25% and achieved year-over-year organic revenue growth of 23%, including 24% within our Critical Infrastructure segment and 23% within our Federal Solutions segment. Our record organic revenue growth was driven by our ability to win and ramp up new contracts, drive task orders to large single-award contracts, maintain strong employee hiring and retention, and operate effectively in two well-funded and growing markets. In addition, our successful M&A program is contributing to our growth by enabling Parsons to move up the integrated solutions value chain by offering higher-end capabilities and differentiated technology solutions resulting in our ability to bid and win larger and higher-margin contracts.

We continue to efficiently grow our business. For the first nine months of 2023, total revenue grew 28%, while adjusted EBITDA increased by 32%. Our ability to drive adjusted EBITDA growth faster than our strong revenue growth demonstrates our focus on margin expansion. During the third quarter, we achieved a book-to-bill ratio of 1.0 times on an enterprise basis. These results were driven by a 14% year-over-year increase in contract awards. This is now the 12th consecutive quarter in which Critical Infrastructure's book-to-bill ratio has exceeded 1.0 times. We're pleased that over 50% of our wins represent new work, illustrating our continued ability to effectively compete and move up the value chain. On a trailing 12-month basis, our enterprise book-to-bill ratio is 1.2 times.

We were awarded four contracts, two in each segment that exceeded $100 million during the third quarter. We've now won 13 contracts over $100 million through the first nine months of 2023. This is the most we've ever won in a single year, and it exceeds our prior annual revenue -- or our prior annual record of 11 contracts greater than $100 million in fiscal year 2022. Significant third quarter contract wins included: $160 million contract by the intelligence community to develop hardware and software solutions that enable intelligence operations. This seven-year classified contract represents both new and repeat work with a customer that Parsons has supported for over two decades. We booked $70 million on this contract in the third quarter.

A seven-year $150 million contract by the Southern Nevada Water Authority to enhance system reliability, increase water use efficiency and improve community health. This contract represents both new and re-compete scope, and we booked $47 million on this contract in the third quarter. We are proud to have supported this critical customer for the past 30 years on more than 120 major projects. A five-year contract with an estimated value of $130 million on the NASA Repairs, Operations, Maintenance and Engineering contract. As a subcontractor to a small business, Parsons will provide facilities, construction management and engineering and technical services. This contract represents both new and re-compete scope, and we plan to book approximately $30 million in the fourth quarter.

Additional scope of over $100 million for development of NEOM's THE LINE, an infrastructure project in the Kingdom of Saudi Arabia. Parsons is proud to be supporting this giga project, which is a first of a kind linear smart city, driven by 100% renewable energy. Parsons is contributing on all five of Saudi Arabia's giga projects. We were also awarded two contracts in the Indo-Pacific region totaling over $70 million supporting the United States Army Corps of Engineers. We were awarded a new three-year $44 million contract to provide the design build of United States Army Housing on Kwajalein Island. We were awarded a new task order for $27 million over five years to assess munitions, explosives and material for hazardous removal and provide construction management for the United States Missile Defense Agency facilities on Guam.

We booked $54 million in total under these two contracts in the third quarter. We've been awarded extensive work in INDOPACOM by leveraging our program and construction management, engineering and planning, cyber and intelligence, and space and missile defense expertise. We are proud of our sustained regional presence, and we are focused on continuing to support our United States customers in the national security needs as part of the $9.1 billion Pacific Deterrence initiative in the fiscal year '24 budget. During the third quarter, we also announced and closed on our acquisition of Sealing Technologies in a transaction valued at approximately $200 million. Sealing Tech expands Parsons' customer base across the Department of Defense and Intelligence community and further enhances our capabilities in defensive cyber operations, integrated mission solutions powered by artificial intelligence, critical infrastructure protection and secure data management.

Sealing Tech's defensive cyber capabilities complement Parsons' leading offensive cyber capabilities and increase our market share in full-spectrum cyber operations, which is expected to be a leading growth area in both Parsons Federal Solutions and Critical Infrastructure segments due to evolving cyber threats. After the third quarter ended, we also acquired Texas-based full-service consulting engineering firm, I.S. Engineers, which specializes in transportation engineering, including roads and highways and program management. This acquisition is consistent with Parsons' strategy of completing accretive acquisitions of companies with revenue growth and adjusted EBITDA margins exceeding 10%, while adding critical infrastructure talent and bolstering the company's portfolio in large and growing states.

Texas is poised to receive nearly $30 billion in total transportation funding from the Infrastructure Investment and Jobs Act between 2022 and 2026. We have an active M&A pipeline across both segments, and we will continue to use our strong balance sheet to complete additional accretive acquisitions that align with our strategy and drive growth and margin expansion. As part of our long-standing commitment to ESG, during the third quarter, we were recognized by the STEM Workforce Diversity magazine for the eighth consecutive year as a top national science, technology, engineering, and math employer for minorities, women and people with disabilities. We were also named to the Best of the Best 2023 Top Veteran-Friendly Companies list by the U.S. Veterans Magazine.

This award recognizes companies that are recruiting and providing a rewarding work culture for veterans, transitioning service members, disabled veterans and military spouses. In addition, we were recognized by Engineering News-Record as one of the top three global companies in 2023 in four categories: Professional Services, Program Management, Construction Management and Program/Construction Management for Fee. These rankings reflect our worldwide reputation and ability to successfully win and perform infrastructure programs. We are proud to be a company of our size with such high rankings. In summary, we had another strong quarter. For the second quarter in a row, we delivered record total revenue, organic revenue growth and adjusted EBITDA.

We also achieved record third quarter operating cash flow, a double-digit increase in contract awards, and maintained strong employee hiring and retention. We closed an accretive acquisition that strengthens our defensive cyber capabilities. And after the third quarter ended, we acquired an infrastructure company that strengthens our engineering expertise and expands our geographic footprint in a high-growth state. I want to thank our talented employees for their commitment to successfully delivering on our customers' critical missions. Their dedication has enabled us to achieve our operating performance success. As I look forward, I continue to be very excited about our bright future. We're in six growing and enduring markets. In Critical Infrastructure we're benefiting from unprecedented global spending, which we expect to continue for decades to come.

In our Federal Solutions segment, our portfolio of cyber and intelligence, space and missile defense, and critical infrastructure protection aligns to the national defense strategy and macro environment trends. Given the breadth of our capabilities and our technical expertise, I believe we have the right portfolio and the right team to capitalize on these tailwinds. These factors, along with our Sealing Tech and I.S. Engineers acquisitions provide us the confidence to raise our full year revenue, adjusted EBITDA and cash flow guidance. With that, I'll turn the call over to Matt to discuss our third quarter financial highlights. Matt?

Matt Ofilos: Thank you, Carey. As Carey indicated, our third quarter was highlighted by record results in a number of areas, including total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. Total revenue of $1.4 billion for the third quarter of 2023 increased 25% from the prior year period and was up 23% on an organic basis. Organic growth was driven by the ramp-up of recent contract wins and growth on existing contracts and inorganic revenue benefited from our Sealing Tech and IPKeys acquisitions. SG&A expenses for the third quarter were 15.6% of total revenue compared to 17.4% in the third quarter of 2022 due to a continued focus on efficient growth across the portfolio. On a year-to-date basis, SG&A was 16% compared to 18.8% in 2022.

The 280 basis point improvement is an intentional focus on delivering higher margins through cost control to go with strong topline growth. Adjusted EBITDA of $128 million increased 24% from the third quarter of 2022. This increase was driven primarily by organic growth and a high-margin change order on an unconsolidated joint venture project. The 10 basis point margin decrease to 9% was driven by higher projected incentive compensation costs as a result of the company's strong operating performance and growing employee base. For the first nine months of the year, our adjusted EBITDA margins have expanded in both segments and have increased 30 basis points overall from the prior year period to 8.5%. I'll turn now to our operating segments, starting first with Federal Solutions, where third quarter revenue increased by $160 million or 26% from the third quarter of 2022.

This increase was driven by organic growth of 23% and the inorganic revenue contribution from our Sealing Tech acquisition. Organic growth was driven primarily by growth on new and existing contracts, partially offset by the previously discussed wind-down of the Kwajalein Island contract. Federal Solutions adjusted EBITDA increased by $4 million or 7% from the third quarter of 2022, primarily due to growth on recent contract awards. Adjusted EBITDA margin decreased 160 basis points to 8.3% based on the timing of program milestones and completions as well as higher projected incentive compensation costs as a result of the company's strong operating performance and growing employee base. Year-to-date, Federal Solutions adjusted EBITDA margin remained strong at 9.5%, which is more in line with our long-term expectations.

Moving now to our Critical Infrastructure segment. Third quarter revenue increased by $125 million or 24% from the third quarter of 2022. This increase was driven by organic growth of 24% and the inorganic revenue contribution from our IPKeys acquisition. Organic growth was driven by higher volume in both the Middle East and North America. Critical Infrastructure adjusted EBITDA increased by $21 million or 51% from the third quarter of 2022. Adjusted EBITDA margin increased 170 basis points to 9.8%. The adjusted EBITDA increases were driven by accretive organic growth and a high-margin change order on an unconsolidated joint venture project that positively impacted equity and earnings. Next, I'll discuss cash flow and balance sheet metrics.

Our net DSO at the end of Q3 2023 was 65 days, down 3 days from the prior year period. During the third quarter of 2023, we generated $204 million of operating cash flow, compared to $123 million in Q3 of 2022. For the nine months ended, we generated $218 million of operating cash flow, a 47% increase over the prior year period. These increases were primarily driven by improved profitability and strong collections across the portfolio during the third quarter. Capital expenditures during the quarter totaled $13 million compared to $6 million in the prior year period. CapEx continues to be well controlled and remains in line with our planned spend of approximately 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of 1.4 times consistent with the second quarter, even after the all-cash acquisition of Sealing Tech, which closed in August.

Our low leverage, strong free cash flow outlook and undrawn borrowing capacity is enabling us to continue to make internal investments and accretive acquisitions to support long-term growth. Turning to bookings for the third quarter. Year-over-year contract award activity increased 14% to $1.4 billion. The strong bookings performance was driven by a 12% increase in our Federal Solutions segment and a 17% increase in Critical Infrastructure. Our book-to-bill ratio for the third quarter was 1.0 times, with Federal Solutions at 1.0 times and Critical Infrastructure at 1.1 times. On a trailing 12-month basis, contract awards increased 47%, and our book-to-bill ratio was 1.2 times with Critical Infrastructure at 1.2 times and Federal Solutions at 1.1 times.

Our backlog at the end of the third quarter totaled $8.8 billion, up $587 million or 7% from the third quarter of 2022. Now, let's turn to our guidance. We're increasing all of our 2023 guidance ranges provided on August 2 to reflect our record third quarter results, recent large contract wins, hiring and retention momentum, Sealing Tech acquisition and our outlook for the remainder of the year. For 2023, we are increasing the midpoint of our revenue guidance by $300 million to a range of $5.175 billion to $5.325 billion. This represents total revenue growth of 25% at the midpoint and 19% on an organic basis. Additionally, we are increasing our adjusted EBITDA by $25 million at the midpoint. We now expect adjusted EBITDA to be between $440 million and $460 million, which represents 28% growth at the midpoint of the range.

Margin at the midpoint of our revenue and adjusted EBITDA range remains at 8.6%. We are also increasing our cash flow guidance. We now expect operating cash flow to be between $300 million and $340 million, representing 35% growth at the midpoint. This guidance also reflects $33 million of deferred cash payments made at the beginning of Q4. Free cash flow conversion is expected to remain around 100% of adjusted net income for the full year. Our updated guidance represents 6% of additional revenue and adjusted EBITDA growth at the midpoint of our ranges. Other key assumptions in connection with our 2023 guidance are outlined on Slide 10 in today's PowerPoint presentation located on our Investor Relations website. In summary, we've delivered strong results in each of the first three quarters of the year.

Through the first nine months of the year, we have achieved revenue growth of 28% and adjusted EBITDA growth of 32%. We're confident in our ability to achieve our increased 2023 guidance as a result of our strong funded and total backlog, continued hiring and retention momentum, robust global infrastructure spend, and the increasing need for national security solutions. With that, I'll turn the call back over to Carey.

Carey Smith: Thank you, Matt. I'm very pleased with the performance of our company. We delivered record quarterly total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. We also continue to be a top organic revenue growth leader in both of our segments, and we're executing on our strategic M&A program, what's driving growth into our business. Given our strong operating performance, we're raising guidance for all three of our financial metrics. Our team is delivering consistent results, and we are benefiting from tailwinds in each segment. We expect our momentum to continue given our portfolio is well aligned to important macro environment trends in two well-funded segments and six growing and enduring markets. With that, we'll now open the line for questions.

Operator: Thank you. [Operator Instructions] The first question comes from Bert Subin with Stifel. Your line is open.

See also 20 Most Stolen Vehicles in the US in 2023 and 30 Most Stressful Jobs in the US.

To continue reading the Q&A session, please click here.