Parsons Corporation (NYSE:PSN) Q4 2023 Earnings Call Transcript
Parsons Corporation (NYSE:PSN) Q4 2023 Earnings Call Transcript February 14, 2024
Parsons Corporation beats earnings expectations. Reported EPS is $0.69, expectations were $0.63. Parsons Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen. Thank you for standing by. Welcome to Q4 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 fourth quarter and fiscal year 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 fourth quarter financial results, as well as a review of our 2024 guidance and increased Investor Day target. 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 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 fiscal year 2023 and fourth quarter earnings call. I want to start by thanking all 18, 500 employees of Parsons Corporation for their contributions to an exceptional 2023. We executed on our growth strategy, delivered our customers critical missions, and achieved record financial results for shareholders. For the full year and the fourth quarter, we delivered the strongest financial results since our IPO, including records for total revenue, organic revenue, adjusted EBITDA, operating cash flow and contract awards. Starting with the full year, we exceeded $5.4 billion in revenue for the first time and delivered record organic revenue growth of 23%, making us an industry leader in both our Federal Solutions and Critical Infrastructure Segments.
We had consistent results throughout the year with organic growth in excess of 20% for each of the last three quarters of the year and double digit organic growth in all four quarters. Our strong results for the year were driven primarily by our ability to win and ramp new contracts, strong hiring and retention, and on-contract growth. In 2023, we delivered over $460 million and adjusted EBITDA for the time in our company’s history and continue to expand our margin, achieving 13 basis points of improvement for the year. Total revenue grew 30% while adjusted EBITDA increased by 32%. Our ability to drive adjusted EBITDA growth faster than our revenue growth demonstrates our focus on margin expansion. For the full year, our contract awards increased 40% to a record $6 billion, which equates to a 1.1x book-to-bill ratio.
In addition, our fiscal year 2023 cash flow increased by 72% over 2022 to a record $408 million. For the fourth quarter, total revenue increased 35% year-over-year and 34% organically. Adjusted EBITDA grew by 30% over the prior year period, and cash flow from operations was $190 million. During the fourth quarter, we won two single award contracts worth more than $100 million each. This brings our total contract wins that are greater than $100 million to 15 for the full year, a new record for Parsons. Our ability to successfully deliver on our customers' missions has allowed us to continue to win new work and secure our re-compete. Also, our exquisite Federal Solutions portfolio is aligned with national security near peer threat priorities, and our digitally enabled Critical Infrastructure business is capitalizing on unprecedented global infrastructure spend.
Significant fourth quarter wins included a single award classified contract for continued and new work in support of the United States government. This five year contract valued at over $250 million, of which we booked $50 million in the fourth quarter. A new $150 million single award contract to serve as lead designer on a major infrastructure replacement project in the Northeast United States. We plan to book the full value of the contract in the first quarter of 2024. A new $80 million contract to provide remediation of life contaminated soil free United States customer. We booked $73 million on this contract in the fourth quarter. We were also awarded prime positions on two multiple award IDIQ contracts. The first one is a new five year contract for the Army Corps of Engineers with a ceiling value of $245 million for environmental remediation.
This contract includes infrastructure investment and Jobs Act funding related to Environmental Protection Agency Cleanup projects. We continue to win significant environmental remediation projects. During the fourth quarter, we also completed a comprehensive assessment, investigation, and treatment of PFAS for a major Fortune 100 industrial client. We completed this project from investigation to treatment without causing any downtime for the customer's facility, which is a testament to the innovation, creativity, and expertise of a multidisciplinary PFAS team. The Parsons Water Treatability Lab in Syracuse, New York has been a leader in water treatment innovation for more than 30 years. The second multiple award contract that we won in the fourth quarter is a new five-year General Services Administration Public Building Services program.
In this contract has an estimated ceiling value of $200 million. After the fourth quarter of 2023 ended, we were awarded two significant contracts. We were selected by the Department of Labor Job Corps to assist with planning, management, and oversight of their facilities program. This single award five-year re-compete contract has a ceiling value of over $115 million. We were also awarded a new three-year, $87 million contract to provide project management services for a major tourism and entertainment development project in the Middle East. During the fourth quarter, we completed the acquisition of IS Engineers, which is a Texas-based full service consulting engineering firm that specializes in transportation engineering, including roads and highways and program management.
This acquisition adds Critical Infrastructure talent and strengthens our portfolio in this large and growing state. Texas is poised to receive nearly $30 billion in total transportation funding from the Infrastructure Investment and Jobs Act between 2022 and 2026. The acquisition of IS Engineers marks our third acquisition in 2023, which includes two acquisitions in Critical Infrastructure and one in Federal Solutions. In addition to bolstering our Critical Infrastructure portfolio through strategic acquisitions, we strengthened and reorganized this segment to better align with our customers, geographies, and end markets, and better position Parsons to capitalize on the unprecedented global infrastructure spent. For informational purposes, we have provided historical financial results in the back of our earnings press release for our new business units.
As part of our 80-year history of cultivating a responsible enterprise, Parsons is proud to be recognized with the highest achievable score of 100 by the Human Rights Campaign Foundation on their 2023-2024 Corporate Equality Index for active support and inclusion of the LGBTQ plus community. In addition, Parsons was recognized as a Best for Vets, company by the Military Times for supporting veterans post-military careers. In 2023, we were also named as one of the world's most ethical companies by Ethisphere for the 14th consecutive year, one of the world's best companies by Time Magazine, and one of the best employers for diversity by Forbes. In summary, we are executing on our strategy and delivering our customers' missions as we continue to post record results and strong growth rates across all financial metrics.
We also expanded margins and closed an accretive acquisition that strengthens our engineering expertise and increases our footprint in a high-growth geography. As we enter 2024, in the 80th anniversary of our company, we are excited about our long-term prospects. We are well positioned in two high -growth and complementary segments that continue to experience significant tailwinds. Starting with Federal Solutions, the proposed defense budget supports an $886 billion top line budget, which is 3% higher overall than 2023. However, the Parsons' core defense markets are growing at mid to high single digits. Given world-wide geopolitical events, we continue to see strong demand for our solutions, including cyber, electronic warfare, signals collection, space, missile defense, and Critical Infrastructure protection.
Our focus remains on outpacing our nation's near-peer threats with our differentiated solutions. In Critical Infrastructure, global demand remains strong in all three geographies where Parsons operates. The United States, Canada and the Middle East. We are leveraging our core competencies in engineering design, program management, and owners representative to win and deliver on large complex programs. As an industry leader in applying digital transformation to infrastructure, we look forward to continuing to transform this industry. Given our strong performance and our confidence in our current outlook, we are pleased to update the long-term guidance we provided at our investor day on March 15, 2023. Matt will share more details, but in summary, we're raising our revenue growth targets, which is also off a total revenue base that is $1.2 billion higher than it was at the end of 2022.
In addition, we expect to average 20 to 30 basis points of margin expansion each year through 2025, and a free cash flow conversion rate of 100% or more of adjusted net income. We also expect to continue to supplement our organic growth with two to three accretive acquisitions per year in order to enhance our technology differentiation, move further up the integrated solutions value chain, and drive additional shareholder value. With that, I'll turn the call over to Matt to provide more details on our 2023 financial results, 2024 guidance, and our enhanced long-term financial targets. Matt?
Matt Ofilos: Thank you, Carey. As Carey indicated, our fourth quarter and fiscal year 2023 were highlighted by record results in a number of areas, including total revenue, organic revenue, adjusted EBITDA, operating cash flow, and contract awards. Total revenue of $1.5 billion for the fourth quarter of 2023 increased 35% from the prior year period and was up 34% on an organic basis. Adjusted EBITDA of $128 million increased 30% from the fourth quarter of 2022 and adjusted EBITDA margin decreased 30 basis points to 8.6%. The adjusted EBITDA increase was driven primarily by accretive organic growth on recent contract wins, as well as growth on existing contracts. Our adjusted EBITDA growth for the quarter was negatively impacted by a net $20 million headwind from adjustments on two separate programs.
On the first program, we reached a positive proposed judgment on a rail and transit project for which we realized a $38 million favorable impact to fourth quarter adjusted EBITDA. On the second program, within equity and earnings, we took a $58 million adjusted EBITDA charge. The impact was the result of supply chain challenges identified during the procurement of materials. Normalized margins excluding these two adjustments would have been 9.9% and 8.9% for the fourth quarter and full year respectively. Total revenue for the fiscal year 2023 increased 30% from prior year and was up 23% on an organic basis. The strong organic growth throughout the year was driven by the ramp up of recent contract wins and growth on existing contracts. Acquisitions contributed approximately $274 million of revenue for the full year.
SG&A expenses for the full year were 16% of total revenue compared to 18.5% in 2022. The intentional focus on efficient spend positions the portfolio well to continue to drive margin expansion. Fiscal year 2023 adjusted of $465 million increased 32% from 2022 and adjusted EBITDA margin increased over 10 basis points to 8.5%. The adjusted EBITDA increases were driven primarily by increased volume on new and existing contracts, accretive acquisitions and continuing to closely manage costs. I'll turn now to our operating segments starting first with Federal Solutions where fourth quarter revenue increased by $280 million or 50% from the fourth quarter of 2022. This increase was driven by organic growth of 47% and the contribution from our SealingTech acquisition which closed in August of 2023.
Organic growth was driven primarily by the ramp up of recent contract wins and growth on existing contracts. Federal Solutions adjusted EBITDA increased by $35 million or 73% from the fourth quarter of 2022 and adjusted EBITDA margin increased 130 basis points to 9.8%. These increases were driven primarily by increased volume on new and existing contracts with effective cost controls. For the full year, Federal Solutions revenue increased by $808 million or 36% from 2022. This increase was driven by organic growth of 25% and approximately $264 million from acquisitions. Organic growth was driven by the ramp up of recent contract wins and growth on existing contracts. Federal Solutions adjusted EBITDA for the full year increased $90 million or 45% from 2022, and adjusted EBITDA margin increased 60 basis points to 9.6%.
These increases were driven primarily by organic operating leverage, accretive acquisitions, and $20 million of nonrecurring incentive fees recognized in the second quarter of 2023. Moving now to our Critical Infrastructure Segment. Fourth quarter revenue increased by $111 million, or 21%, from the fourth quarter of 2022. This increase was driven by organic growth of 20%, and the inorganic revenue contribution from acquisitions. Organic growth was driven by higher volume on both Middle East and North America infrastructure programs. Critical Infrastructure adjusted EBITDA decreased by $5 million, or 10%, from the fourth quarter of 2022. Adjusted EBITDA margin decreased 240 basis points to 7.0%. The adjusted EBITDA decreases were driven by the $20 million negative net impact previously discussed, partially offset by profits from accretive organic growth on both new and existing contracts.
For the full year, Critical Infrastructure’s revenue increased by $440 million, or 22%, almost all of which was organic. Organic growth was driven by expansion in both the Middle East and North America. Critical Infrastructure’s adjusted EBITDA for the full year increased by $22 million, or 14%, from 2022. And adjusted EBITDA margin decreased 50 basis points to 7.2%. The adjusted EBITDA increase was driven primarily by accretive organic growth and operating leverage. The lower margin was a result of fourth quarter, $20 million net impact from the two programs previously discussed. Excluding the Q4 impact, Critical Infrastructure margins were 10.1% and 8.1% for the quarter and total years, respectively. Next, I'll discuss cash flow and balance sheet metrics.
Our net DSO at the end of Q4 2023 was 59 days, down 10 days from the prior year period. Our fourth quarter operating cash flow totaled $190 million compared to $89 million in the prior year period. Our operating cash flow for the full year increased 72% to $408 million. Our strong cash flow was driven by improved profitability and strong collections across the portfolio. Total year free cash flow conversion was 120%. Capital expenditures totaled $10 million in the fourth quarter of 2023 and $40 million for the full year. CapEx continues to be well controlled and remains in line with our planned spend of less than 1% of annual revenue. Our balance sheet remains strong as we ended the fourth quarter with a net debt leverage ratio of 1.0x compared to 1.4x at the end of 2022, even after closing three acquisitions in 2023.
Our low leverage, strong free cash flow outlook, and balance sheet capacity will enable us to continue to make internal investments and accretive acquisitions to support long-term growth. Turning to bookings for the fourth quarter, year-over-year contract award activity increased 13% to $1.2 billion. On a trailing 12-month basis, contract awards increased by 40%, and our book-to -bill ratio was 1.1x on an enterprise basis and in both business segments. Our book-to-bill ratio for the fourth quarter was 0.8x. In our Critical Infrastructure Segment, we have achieved a quarterly book-to-bill ratio of 1.0 times or better for 13 consecutive quarters. We remain optimistic that IIJA and global infrastructure investments will continue to drive demand and new business well into the future.
Our recent contract awards and backlog support our long-term Critical Infrastructure margin goal of approximately 9% by 2025. Our backlog at the end of the fourth quarter totaled $8.6 billion, up $413 million, or 5% from the fourth quarter of 2022. Next, I'll turn to our guidance. When establishing our guidance, we've contemplated key variables, which include a competitive labor market, uncertainty around domestic budgets, and challenging inflation. However, we're confident in our ability to achieve results within our improved guidance ranges given significant tailwinds, including unprecedented global infrastructure spend, a federal portfolio that is closely aligned to the National Defense Strategy, low re-compete risk, $8.6 billion of total backlog included fund backlog of $5 billion, and $14 billion of contracts won that are not yet reflected in backlog.
For 2024, we expect revenue to be between $5.8 billion and $6 billion. This represents 8% growth at the midpoint of the range and 7% growth on an organic basis. Our adjusted EBITDA is expected to be between $505 million and $545 million, with a margin of 8.9% at the midpoint of our revenue and adjusted EBITDA guidance ranges. This represents adjusted EBITDA growth of 13% and margin expansion of approximately 40 basis points from 2023, achieving our Investor Day commitments. The growth in adjusted EBITDA and associated margin is expected to be driven by improved program performance, accretive wins, and a continued focus on operating leverage. Our cash flow from operating activity is expected to be between $350 million and $410 million. At the midpoint of the guidance range, we expect free cash flow conversion to be approximately 100% of adjusted net income.
2024 cash flow is expected to be down from 2023, primarily due to the exceptional fourth quarter that accelerated approximately $30 million in receipts from 2024. Our other key assumptions in connection with our 2024 guidance and our quarterly cadence are outlined on slide 15 in today's PowerPoint presentation, located on our Investor Relations website. As Carey mentioned, we are increasing the long-term targets we provided at our March 2023 Investor Day. At that time, we expected total revenue growth of 4% to 6% and organic growth of 3% to 5%. We now believe that we can achieve organic revenue growth of mid-single digits or better through 2025. With performance in 2023, a strong outlook for 2024, we are raising our revenue growth targets off a total revenue base that is $1.2 billion higher than it was at the end of 2022.
In addition, we continue to expect an average of 20 to 30 basis points of margin expansion each year through 2025 in a free cash flow conversion rate of 100% or more of adjusted net income. These targets indicate we expect total revenue to exceed $6 billion and adjusted even at the margin to be over 9% by the end of 2025. These implied targets indicate adjusted EBITDA growth is expected to outpace total revenue growth through 2025. We expect to supplement our organic growth with two to three accretive acquisitions per year to further drive shareholder value. In summary, we have reported exceptional results from the fourth quarter and a full year and I'm confident in our ability to achieve results within our 2024 guidance ranges. We are operating in well-funded markets, have a great team that is executing at a high level, and believe we're making the right organic and inorganic investments to continue to drive growth and margin expansion into the business.
With that, I'll turn the call back over to Carey.
Carey Smith : Thank you, Matt. I'm very pleased with the continued strong performance of our company. We delivered record fourth quarter and full year results for total revenue, organic revenue growth, adjusted EBITDA, operating cash flow and contract awards. In addition, we're executing on our strategic M&A program, which is driving additional growth into our business. Our team is delivering consistent results, and we're benefiting from tailwinds in each segment. We expect our momentum to continue, given our portfolio is well aligned to important macroenvironment trends in two well-funded segments, and six growing and enduring markets. With that, we will now open the line for questions.
Operator: [Operator Instructions] The first question comes from Sheila Kahyaoglu with Jefferies.
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