Parsons Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 11 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to the Third Quarter 2023 Parsons Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference over to Dave Spiele, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and thank you for joining us today to discuss our Q3 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 Cary Smith, Chair, President and CEO and Matt Aphelis, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our Q3 financial results and a review of our 2023 guidance.

Speaker 1

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 ks for fiscal year ended December 31, 2022, and other SEC filings.

Speaker 1

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 Keri.

Speaker 2

Thank you, Dave. Good morning and welcome to Parsons' Q3 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 percent organic revenue growth in both segments for the 2nd consecutive quarter, adjusted EBITDA growth of nearly 25%, A double digit increase in contract awards and over $200,000,000 in quarterly cash flow for the first time in our company's history.

Speaker 2

In addition, we closed the strategic acquisition that strengthens our defensive cyber capabilities at a time when and the Seiling Technologies acquisition. We are raising our full year revenue, adjusted EBITDA and cash flow guidance ranges. During the Q3, 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 2 well funded and growing markets. In addition, our successful M and A program has contributed 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.

Speaker 2

We continue to efficiently grow our business. For the 1st 9 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 Q3, we achieved a book to bill ratio of 1.0 times on an enterprise 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.

Speaker 2

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 4 contracts, 2 in each segment that exceeded $100,000,000 during the Q3. We've now won 13 contracts over $100,000,000 through the 1st 9 months of 2023. This is the most we've ever won in a single year and it exceeds our prior annual revenue or a prior annual record of 11 contracts greater than $100,000,000 in fiscal year 2022.

Speaker 2

Significant third quarter contract wins included $160,000,000 contract by the intelligence community to develop hardware and software solutions that enable intelligence operations. This 7 year classified contract represents both new and repeat work With the customer that Parsons has supported for over 2 decades, we booked $70,000,000 on this contract in the 3rd quarter. A 7 year $150,000,000 contract by the Southern Nevada Water Authority to enhance system reliability, increased water use efficiency and improved community health. This contract represents both new and repeat and we booked $47,000,000 on this contract in the Q3. We are proud to have supported this critical customer for the past 30 years on more than 120 major projects.

Speaker 2

A 5 year contract with an estimated value of $130,000,000 on the NASA Repairs, Operations, Maintenance and Engineering contract. As subcontractor to a small business, Parsons will provide Facilities, Construction Management and Engineering and Technical Services. This contract represents both new and repeat scope and we plan to book approximately $30,000,000 in the 4th quarter. Additional scope of over $100,000,000 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.

Speaker 2

Parsons is contributing on all 5 of Saudi Arabia's Giga projects. We were also awarded 2 contracts in the Indo Pacific region totaling over $70,000,000 supporting the United States Army Corps of Engineers. We were awarded a new 3 year $44,000,000 contract to provide the design build of United States Army Housing on Kwajalein Island. We were awarded a new task order for $27,000,000 over 5 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 $54,000,000 in total under these two contracts in the 3rd quarter.

Speaker 2

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 State's customers in the national security needs as part of the $9,100,000,000 Pacific Deterrence Initiative in the fiscal year 24 budget. During the Q3, we also announced and closed on our acquisition of Seiling Technologies and a transaction valued at approximately $200,000,000 Sealingtech 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. Sealingtech'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 Q3 ended, We also acquired Texas based full service consulting engineering firm, IS Engineers, which specializes in transportation engineering, including Roads and Highways and Program Management.

Speaker 2

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 $30,000,000,000 and total transportation funding from the Infrastructure Investment and Jobs Act between 2022 2026. We have an active M and 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 Q3, we were recognized by the STEM Workforce Diversity Magazine for the 8th 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.

Speaker 2

S. Veterans Magazine. This award recognize 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 3 global companies in 2023 in 4 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.

Speaker 2

We are proud to be a company of our size with such high rankings. In summary, We had another strong quarter. For the Q2 in a row, we delivered record total revenue, organic revenue growth and adjusted EBITDA. We also achieved record 3rd quarter operating cash flow, a double digit increase in contract awards and maintain strong employee hiring and retention. We closed an accretive acquisition that strengthens our defensive cyber capabilities.

Speaker 2

And after the Q3 ended, we acquired an infrastructure company that strengthens our engineering expertise and expands our geographic footprint in a high growth 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 6 growing and enduring markets. In Critical Infrastructure, we're benefiting from unprecedented global spending, which we expect to continue for decades to come.

Speaker 2

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 IAS 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 Q3 financial highlights. Matt?

Speaker 3

Thank you, Carrie. As Kerry indicated, our 3rd 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 $1,400,000,000 for the Q3 of 2023 increased 25% from the prior year period And it 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 Sealingtech and IPQs acquisitions. SG and A expenses for the Q3 were 15.6% of total revenue compared to 17.4% in the Q3 of 2022 due to a continued focus on efficient growth across the portfolio.

Speaker 3

On a year to date basis, SG and 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 top line growth. Adjusted EBITDA of $128,000,000 increased 24% from the Q3 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.

Speaker 3

For the 1st 9 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 3rd quarter revenue increased by $160,000,000 or 26% from the Q3 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 Quadrant Island contract. Federal Solutions adjusted EBITDA increased by $4,000,000 or 7% from the Q3 of 2022, primarily due to growth on recent contract awards.

Speaker 3

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. 3rd quarter revenue increased by $125,000,000 or 24% from the Q3 of 2022. This increase was driven by organic growth of 24% and the inorganic revenue contribution from our IP Keys acquisition.

Speaker 3

Organic growth was driven by higher volume in both the Middle East and North America. Critical Infrastructure adjusted EBITDA increased $21,000,000 or 51 percent from the Q3 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.

Speaker 3

Our net DSO at the end of Q3 2023 was 65 days, down 3 days from the prior year period. During the Q3 of 2023, we generated $204,000,000 of operating cash flow compared to $123,000,000 in Q3 of 2022. For the 9 months ended, we generated $218,000,000 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 Q3. Capital expenditures during the quarter totaled $13,000,000 compared to $6,000,000 in the prior year period.

Speaker 3

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 1.4x, consistent with the 2nd 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 Q3. Year over year contract award activity increased 14% to $1,400,000,000 The strong bookings performance was driven by a 12 with Federal Solutions at 1.0 and Critical Infrastructure at 1.1 times.

Speaker 3

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 and federal solutions at 1.1. Our backlog at the end of the 3rd quarter totaled $8,800,000,000 up $587,000,000 or 7% from the Q3 of 2022. Now let's turn to our guidance. We're increasing all of our 2023 guidance ranges provided on August 2nd to reflect our record 3rd quarter results, Recent large contract wins, hiring and retention momentum, ceiling tech acquisition and our outlook for the remainder of the year. For 2023, we are increasing the midpoint of our revenue guidance by $300,000,000 to a range of $5,175,000,000 to $5,325,000,000 This represents total revenue growth of 25% at the midpoint and 19% on an organic basis.

Speaker 3

Additionally, we are increasing our adjusted EBITDA by $25,000,000 at the midpoint. We now expect adjusted EBITDA to be between $440,000,000 $460,000,000 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're also increasing our cash flow guidance. We now expect operating cash flow to be between $300,000,000 $340,000,000 representing 35% growth at the midpoint.

Speaker 3

This guidance also reflects $33,000,000 of deferred cash payments made at the beginning of Q4. Free cash flow conversion is expected to remain around 100 percent 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 1st 3 quarters of the year.

Speaker 3

Through the 1st 9 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 Keri.

Speaker 2

Thank you, Matt. I'm very pleased with the performance of our company. We delivered record total 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 and A program, which is driving growth into our business. Given our strong operating performance, we're raising guidance for all three of our financial metrics.

Speaker 2

Our team is delivering consistent results and we are benefiting from tailwinds in each segment. We expect our momentum to continue given our With that, we'll now open the line for questions.

Operator

Thank The first question comes from Burt Soudin with Stifel. Your line is open.

Speaker 4

Hey, good morning and congrats on a great quarter.

Speaker 3

Thanks, Bert.

Speaker 4

Kerry, Organic growth has been pretty unbelievable last few quarters, both segments above the 20% mark, which is obviously quite a bit ahead of your peers. That seems pretty intact as we look to 4Q, maybe a little lower, but still really elevated. As we think about the 4th quarter, what's driving such a wide range of I assume it's the government shutdown or the potential for a shutdown. And then as we look out to 2024, what gives you confidence growth can remain elevated if Maybe not at the 20% mark, but still pretty quick for what you put out at the Investor Day.

Speaker 2

Yes. Thanks for the question, Bert. So first, we're very pleased with our growth to date and obviously 2 consecutive quarters of 23% organic growth. We're in terrific markets, All 6 end markets are growing. As we look to the latter half of the year, we have one headwind, which is our QuadruLENE program in Engineered That's about $15,000,000 that we need to overcome.

Speaker 2

But I would say the biggest variable is really kind of uncertainty relative to the budget environment. And then we do get seasonality in our business, both in federal and in critical infrastructure. Our FAA program in federal has seasonality and our mine programs up in Canada. With that said, we're confident of achieving the midpoint to the high end of the range as far as revenue Performance. As we look to 'twenty four, it would be great to be able to continue this terrific organic growth performance, but We're obviously making sure that we put together measured guidance and that we can meet what we commit to deliver.

Speaker 4

Maybe just on that Could you give a little bit more commentary on the large cyber contract win you had had? I think that's probably quite early stages, maybe more of a 24 contributor. And then what you're seeing on the IJA front or if you can't break it out on IJA just in terms of what you're seeing in domestic infrastructure spend?

Speaker 2

Yes. So the large cyber win, it's a contract that we've held, but they're going to be adding some new and expanded scope. It's a classified contract And it's supporting an intelligence community customer. I can just say we've spurred this customer for over 2 decades. We're very pleased with that.

Speaker 2

We've also continued our success beyond this classified customer with the United States Cyber Command, securing both our J-six and our J-nine brief piece. That's critically important as we look forward to next year because Cyber Command has now been given budget authority similar to what the United States Special Operations Command has. So beyond the intelligence community, we're seeing excellent growth across our cyber business. Within the IIJA, there's been about 180 $4,000,000,000 of the funds that have started to roll out from the $1,200,000,000,000 Our estimate is still that we're going to see the majority It starts to roll out in the latter part of this year, early next year. And we expect the peak to move from a 2026 Timeframe to a 2027 timeframe based on the rollout.

Speaker 2

As you can see from 12 consecutive quarters, so greater than 1.0 Book to bill and we're over driving organic growth in both the Middle East and the United States. We are starting to benefit from that. It also helps our federal segment because our FAA contract, which we just won the repeat, the FAA is getting $25,000,000,000 now. The infrastructure bill $5,000,000,000 Structure bill $5,000,000,000 of that is going to go to facilities work and that's directly aligned with our scope on the FAA contract.

Speaker 4

Great. Super helpful, Carrie. And then Matt, just a final question on the margin side. Can you just update us on where we stand on the 2 legacy critical infrastructure projects? Those are still expected to one is still expected to wrap before year end and the other by the end of next year.

Speaker 4

And then what are you seeing in terms of margins and backlog as you go forward just with some a lot of the pretty unprecedented demand that Carey mentioned?

Speaker 3

Yes, I think great question Bert. I think To your point, to start with the legacy programs, the first one is still due to wrap up in Q4. So we're tracking kind of punch list items in the high 90s, 97 plus complete by the end of the quarter. So again, we're still tracking to Q4 wrap up, which is great to have that behind us. Again, that one sits in equity and earnings.

Speaker 3

2nd one is a self perform program that is still projected to wrap up late 2024. So those are kind of on track. No change from prior quarter, I would say. No significant change from prior quarter. When it comes to kind of The bid pipeline and the backlog, we're definitely focused on expanding margins.

Speaker 3

I think at the Investor Day, we talked about 20 to 30 basis points per year. We're pushing the teams hard to deliver on that and we're starting to see that in the bid pipeline and the backlog.

Speaker 2

And just one addition, Matt indicated the 1st program is 98% complete, the 2nd program is 84% complete.

Speaker 4

Great. Thanks so much.

Speaker 1

Thanks, Bert.

Operator

Please standby for the next question. The next question comes from Tobey Sommer with Truist. Your line is open.

Speaker 5

Thanks. I wanted to ask you about the M and A market and your Appetite across the two segments. Are you seeing targets that Meet your criteria and sort of are the right size, etcetera. We recently attended an M and A conference and The pace of activity and available things in the market was described as kind of low. So I'm curious what you're seeing?

Speaker 2

Yes. Thank you, Tobey, and good morning. So our appetite is going to be to continue to pursue M and A. That's It's been a key part of our game plan and critical to our growth and I think that's really helped us win all these large pursuits, which testified by 13 wins this year greater than $100,000,000 exceeding last year's record of $11,000,000 or $11,000,000 for the total year. I used the last 2 M and A examples as ones that are in our sweet spot and crossover.

Speaker 2

IP Keyes is a company that does cyber compliance and monitoring specifically for power utility companies as well as water companies. So it's a nice intersection between our federal and our critical infrastructure business. Likewise, Sealing Technologies, while most of their work to date has Per the Department of Defense and the Intelligence Community, we're looking at combining their capabilities with the IP keys capabilities and new product offerings. And Sealing Technologies flyaway kits can also be used for commercial applications. As far as criteria and meeting the right size, we're going to keep our strict criteria, which is greater than 10% top line growth and 10% margin expansion.

Speaker 2

I'll also just mention IS Engineers, they provide transportation engineering. And while that's predominantly on our critical infrastructure side, Some of the work they do there can also help our Engineered Systems Group on the federal side of the house.

Speaker 5

Thank you. And then Could you refresh us on what the impacts were on the Either the income statement or cash collections, contract awards in the last government shutdown, so we could No, sort of what to look for in terms of potential impacts should one unfold over the next coming months?

Speaker 2

Yes. So the last government shutdown, we were only impacted by one contract that was shutdown that occurred late 2018 or late 2019. And that was our FAA contract. So I would say it really depends on what is exempted from the shutdown process as they My personal opinion, I expect that we're going to continue to see continuing resolutions. The current CR ends November 17.

Speaker 2

We've learned how to deal with CRs. There's been 47 of them between FY10 and FY20 to those have lasted for a duration of 1 to 176 days or just less than 6 months. So we know how to deal with that very well. And the nice thing with the Parsons portfolio and a CR perspective is 50% of our portfolio is outside of the federal budget because we have the commercial business On the international business, we also have very strong backlog at $8,800,000,000 59% of that is funded backlog And we have $14,000,000,000 of contract wins that we've not yet reflected in bookings or backlog. So I feel our portfolio is In very good shape to withstand the CR and remain optimistic that we will not have a shutdown.

Speaker 3

Yes. And Toby, specifically on the top line side, FAA was impacted by about $20,000,000 back in 2019 during that shutdown, so just to give you kind of a directional. But importantly, the DoD was exempted at that point.

Speaker 5

Thank you very much.

Speaker 2

Thanks, Tobey. Thanks, Tobey.

Operator

Please standby for the next question. The next question comes from Andrew Wittmann with Baird. Your line is open. The next question comes from Andrew Wittmann with Baird. Your line is open.

Operator

Please standby for the next question. The next question comes from Cai von Rumohr with P. V. Cohen, your line is open.

Speaker 6

Thank you very much and terrific quarter guys, Very impressive.

Speaker 3

Thank you, Pat.

Speaker 6

So what do you have baked into your Guidance for a shutdown, I agree with you totally. CR is not going to be a big deal, but a shutdown and If it's 45 days, what would happen to the FAA? And is there any incremental margin impact? Mike, if you lose $20,000,000 of revenues, is the incremental margin 20%?

Speaker 2

Yes, I'll start and then Matt can address the margin impact. So because of the type of services we provide, first again, 50% of our Portfolio will not be affected, but because of the site type of services we provide the alignment with the National Defense Strategy, everything going on in the world today, We remain optimistic that during a shutdown, most of our programs are going to continue, just again as an example, FAA being the only one that was impacted last 2019 shutdown. Matt, on the market? Yes.

Speaker 3

I would say, Cai, specifically, If there were no shutdown, I think we would kind of trend toward the higher end of the guide. At the midpoint, we've got the great news is If you look year over year, our funded backlog is up about 13%. So we've got really strong funding on our existing jobs. And so we feel pretty good. But For FAA specifically, you can probably think about it as a 10 ish percent and the majority of the work ranging in that 8% to 10%.

Speaker 3

If you had a $20,000,000 or $40,000,000 it would be $2,000,000 to $4,000,000 of EBITDA, I would say.

Speaker 6

But I guess the issue is like so If you can't do the work, the employees are there and presumably want to get paid. So is the incremental margin higher just because I So you have to pay their salaries even though they're not able to bill?

Speaker 3

Yes, it's There's a mix of furlough, there's PTO, there's modified time. So the team is really effective at working through those things, but I don't suspect it will be a pure absorption of all the employee costs.

Speaker 2

The other thing that we've available to us is research and development. So we either use combination of PTO or research and development.

Speaker 6

Okay, great answer. And then How is hiring? I mean, when you're growing 20% 2 quarters, does that Put any stress on your ability to hire folks and your ability to kind of control the growth?

Speaker 2

So both our hiring and retention are strong. Our retention year over year continues to improve. And hiring has been great obviously to be able to keep up with So growth, I would say our human resources team as well as all of our 4 of our business units are laser focused on both the hiring and the retention and doing an excellent job.

Speaker 3

Yes. I'd say generally speaking, Kai, we've been investing in the Support functions appropriately to support the growth.

Speaker 6

Terrific. Thank you so much.

Speaker 3

Thank you,

Operator

Please standby for the next question. The next question comes from Louie DiPalma with William Blair. Your line is open.

Speaker 7

Carrie, Matt and Dave, good morning.

Speaker 3

Good morning, Louis. Hi, Louis.

Speaker 7

Carrie, your Middle East business reported 30% plus revenue growth for the 3rd consecutive quarter. You mentioned your customers in the Middle East have added Go to existing projects, is there visibility for Middle East revenue to continue to expand from here?

Speaker 2

Thanks, Louie. So Middle East has been very strong. We're fortunate again that we're on 505 of the Saudi giga projects. The ones That I will say are particularly important to us are neon the line, neonoxagon as well as Cadia. We're also outside of Saudi Arabia though seeing growth.

Speaker 2

Saudi Arabia has its Vision 2,030, but there are similar visions that have been established in the UAE, both in Dubai and Abu Dhabi for projects of the 50 and Vision 2,040. And then Qatar also has a Vision 2,030. So we expect to be able to continue to grow in the Middle East. Obviously, 30% plus is very strong. We'd love to be able to keep it at that rate, but I do think We see a very long term trajectory out through 2,050 of continued Middle East expansion.

Speaker 7

Great. And also recent data shows that the Intel Community budget had a big increase in fiscal 'twenty three and is in line for another large jump in fiscal 'twenty four assuming The budget passes. You referenced several cyber Intel contract wins. Can you discuss how your Acquisitions have enhanced your solutions portfolio and Have you been able to take market share from competitors and take contracts away from competitors? Because You're definitely growing faster than competitors in this Intel market.

Speaker 7

Thanks.

Speaker 2

Yes. Thanks, Louise. So I'll take the second part first. We don't generally target market share takeaway. We are really after the new and emerging Customer challenges.

Speaker 2

So, if you look at our capabilities in cybersecurity, we play at the very top end of the pyramid. Again, 75% roughly is offensive, 25% is defensive in our portfolio. The companies we bought have all enhanced Our cyber capabilities recently, I mean, if I start with, Seiling Technologies. Seiling Technologies has flyaway kits where they can basically deploy these kits to be able to enable defensive cyber operations security on systems and networks for customers. They support the Intel community and the Department of Defense, but as I mentioned on the call, We also see potential expansion there to our commercial clients as well.

Speaker 2

IP Keys likewise has provided capabilities. They do cyber Compliance and monitoring, specifically for energy companies and water companies, for the energy companies that's compliance with the NERC and FERC standards and making sure that companies have NIST compliance. All of these are very important as we look forward. Cyber will be an area that we Like the $1,200,000,000 GSA job we highlighted last quarter.

Speaker 7

Excellent. Thanks, Carrie. That's it for me.

Operator

Our next question comes from Josh Sullivan with The Benchmark Company. Your line is open.

Speaker 4

Hey, good morning. Congratulations on a good quarter here.

Speaker 2

Thank you, Josh.

Speaker 3

Thanks, Josh.

Speaker 4

Just following up on that, with the acquisition The $110,000,000 you're expecting in 2024, how large is your overall cyber exposure at this point? And Should we expect that to have above corporate average margins?

Speaker 2

Yes. So cyber represents About 13% of our portfolio and yes, it does have above average margins.

Speaker 4

And with Salient, do you expect that to be higher next year, that 13%?

Speaker 2

The 13% as of today, so sailing tech adds an additional 110 to the portfolio.

Speaker 3

Yes, I would say Josh that The cyber business is growing double digits, so we suspect it will continue to increase as a percentage of the company.

Speaker 4

Got it. And then just on the $250,000,000 radiation device win, how much of that is hardware versus software And then do you see that as a market which could find some international interest as well?

Speaker 2

Yes. So the majority of the radiation device went is Systems integration, so we're actually putting the system together that performs the testing at areas like airports And ports, for example, and also it could be used on the border as well. We do see market expansion there. We have a pipeline both in the United Thanks, Josh.

Operator

Please standby for the next question. The next question comes from Andrew Wittmann with Baird. Your line is open. Our next question comes from Andrew Wittmann with Baird. Your line is open.

Operator

Please standby for the next question. The next question comes from Noah Poponak with GS, your line is open.

Speaker 8

Hey, good morning, everyone.

Speaker 2

Good morning, Noah.

Speaker 3

Good morning, Noah.

Speaker 8

Carrie, you've discussed here the possibility of a shutdown versus short term extensions. It seems like the longer there are short term extensions though, the less likely there's actual full year bills. And we live in this unique situation where the debt limit deal says, there's this 1% cut Kind of across the board on the discretionary side if there are no bills. How are you just given you have really good perspective on these macro things, What do you think is the likelihood of that? How are you managing Parsons relative to that possibility?

Speaker 2

Yes. Thanks, Noah. So to your point, the debt limit did set in place a cut and that cut would occur at the start of April. So the new House Speaker has said he's looking at continuing resolutions. One option is to run until January, one option is It won't until April, but he is definitely factoring in that 1% cut as he makes those decisions.

Speaker 2

I would say, again, when you look at the parts So the budget, where we focus is growing between 5% to 12% compound annual growth rate. The areas that we play cyber and intelligence, Space and missile defense and critical infrastructure protection are very likely to be the last areas that are going to get cut given the global tensions they're occurring right now around the world. Okay.

Speaker 8

Does the growth of this year Being so strong, just set up a situation for you next year where the compares are so tough that the growth rate decelerates Significantly or with the growth rate that high for 1 year and the amount of new business wins you have, Do you not expect or should we not be anticipating that significant of a base effect next year?

Speaker 3

I would say, Noah, that when we look at the longer term planning at the Investor Day, we talked about 4% to 6% Growth and so the baseline we've been telling folks is go off the updated guide and assume the same kind of growth rates. Obviously, 20% plus is a little bit bullish going into 2024, but we're still comfortable that the range of guide provided at the Investor Day Off the new base is appropriate?

Speaker 2

We plan in February of next year to provide updated long term targets. And I would say one of the big focuses is Keeping up our competitive win rates, which have been close to 70% throughout the year and if we can continue that type of performance. But to Matt's point, we've clearly had a great year.

Speaker 8

Okay. And then Matt, just on margins, If I kind of go to the high end of the new EBITDA range and assume CI adjusted is kind of flat sequentially around that 8%, What would imply Federal Solutions closer to 9%. Is that kind of what you're looking for in the Q4? And then I guess just run rating from here, We're still thinking FS is over 9% and can CI just kind of keep moving higher from this Quarter or will that maybe step down again before it then sustainably is high single digits?

Speaker 3

Yes. I'd say, our goal, of course, is double digit margins for CI within a few years. I think that's a little bit off a couple of years still as we get through these challenge Programs, we did have a little bit of a helper in Q3 related to a change a positive change order. So, to your question on the federal Margin for the total year, we're still expecting mid-9s, which infers like 8.9 at the or low 9s At the high end and an 8.9% at the midrange, so for Q4 specifically. So to your point, I think we still expect Federal to be kind of low-9s to mid-9s, long term goals being in mid-9s for federal.

Speaker 3

And then for CI specifically, we're We're still expecting margins to continue to expand. We really like to see in Q3 at almost 10% and that is kind of our long term goal.

Speaker 8

Okay, sorry. And did you quantify in just an absolute 1,000,000 of dollars the item in CI in the quarter?

Speaker 3

We did it's about $10,000,000

Speaker 8

Okay, great. Thank you.

Speaker 3

We had a couple of quarters where there was A lower margin change order. This was the offsetting upper the higher margin change order this quarter and it was about $10,000,000

Speaker 8

Got it. Super helpful.

Speaker 3

Thank you. Thanks,

Operator

Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Speaker 9

Good morning, guys, and thank you. Great quarter. I think I'm going to ask Noah's questions, but in a slightly more positive light. So Obviously, this growth is super phenomenal and industry leading. What would you say you attribute it Carrie, you alluded to you've been competitively winning 70% of your contracts.

Speaker 9

So as we think about that, like How do you think that translates into the growth for 2024? I know you're still not even in your planning process yet, but These are your 1o contracts that are just starting that are competitive wins and that's how we should think about it? Or can you shed some light there?

Speaker 2

Thanks, Sheila. So I would say, yes, we've had strong competitive win rates. We're also again in 6 growing markets, which really nice across portfolio, you know, across the 2 segments. All 4 of the business units have been growing, with particular strong growth Out of Mobility Solutions and Engineered Systems, we've done a great job continuing to win what I call new and emerging contracts, Be able to win large single award contracts that have ceilings that we can drive task orders to. And then we're really just at the very start of the United infrastructure spend and we're facing a Middle East spend that's going to last for decades.

Speaker 2

So I would say those are the areas that I attribute to the growth. And I think it's terrific that the team has been able to capitalize on all the tailwinds that we're facing in our end markets.

Speaker 3

Sheila, one thing I would add is with all the success we've had, we have the $8,800,000,000 in backlog plus we have $14,000,000,000 Of awarded not booked. So again, that number continues to grow and we're really happy with the continue to execute on the existing jobs and the potential ceiling that will come from those.

Speaker 9

Thank you. And then maybe if I could ask another question both for CI and Federal Solutions. How do we think about the unfortunate events in Israel and Gaza and what's going on there? And how that could potentially impact your business through Intel awards or infrastructure are also negatively impacted depending on the location.

Speaker 2

Yes. So first I'd say, we're very saddened by what's occurred in the Middle East and the tremendous loss of life. We are staying very close To what's transpiring, President Biden, for example, just had a call with Prime Minister of Saudi Arabia on October 24. They're very much aligned in how they're looking at things, which is how do we establish security in the region, how do we support humanitarian assistance. And so I would say our job, whether it's in critical infrastructure or in federal solutions is to provide the necessary support to our customers and make sure that whatever we do helps out the region.

Speaker 2

We have a strong presence there. The work that we do there will continue. It's very important to Those nations. So I don't see any downside impact, but I would say again, our objective is really to do what we can to provide stability.

Speaker 9

Perfect. That's super helpful. And maybe one last one, if you don't mind. Matt, you said on critical Structured $10,000,000 was the positive event in Q3. So as we think about margins there, they've obviously been at a lower 5.5 in Q2 and kind of fluctuating around.

Speaker 9

How do you think we best sort of think about that for 2024?

Speaker 3

Yes, great question, Sheila. I think our goal is, of course, to get this first challenge program behind us this year. It's still Scheduled to wrap up in Q4, so that will be a nice tailwind for us. I think from a guidance perspective, at Investor Day, we Talked about 20 to 30 basis points, so somewhere in the 8.8 to 8.9. The majority of that, as we've talked about before, will come from CI.

Speaker 3

So if you think of federal still in the low 9s, call it 9.1% to 9.3%, the math on a CI would be kind of mid-8s. So I feel like the business is heading in the right direction. The backlog performance is performing at accretive margins. And so we're getting some of these challenges behind us.

Speaker 9

Perfect. Thank you.

Speaker 3

Thanks, Jill.

Speaker 2

Thank you.

Operator

Please standby for the next question. The next question comes from Mariana Perez Mora with Bank of America. Your line is open.

Speaker 10

So my question is going to be a follow-up on M and A. How strong is the pipeline? How are the how is the pricing environment and competitiveness for those deals? Because you usually have acquired companies that you're really close in, And I was interested to learn details about like how that pipeline is looking.

Speaker 2

Thanks, Mariana. The pipeline is very Strong in both federal and critical infrastructure. I mean, we're really pleased that we've been able to close the 3 acquisitions we've been able to do this year. We're always kind of ranking and restacking that pipeline 1 to N, which one's most important based on the financial criteria of top Greater than 10% top line growth, greater than 10% EBITDA. And then looking at the technological differentiators, particularly on the federal side, how do we Double down on geographies that are going to be very important across the United States, but also considering Canada.

Speaker 2

We've been able to continue to find terrific companies and I'm really glad to welcome them to the Parsons portfolio. We've also been able to do this mostly on a preemptive basis, so we try to avoid auctions. That's enabled us to stick within our standard multiples of about a 10 to 13 times. The most recent one we did Frias Engineers was So 7.7 times multiple. So we're really pleased with the terrific companies we've been able to buy and the multiples we've been able to buy them at.

Speaker 2

As you expose yourselves to

Speaker 10

the infrastructure bill across the U. S. And with the recent Texas acquisition. What other states do you think you have opportunity to tap in or will be interested to double down?

Speaker 2

Yes. So when you look at a lot of the funds in the infrastructure bill, 70% of those come out through what's called formula funds and those are generally based on the population of States and their growth over time. So it tends to be the larger states that get the money. Parsons is fortunate. We're positioned in all 50 states, But we've set in place a list of Tier 1 states.

Speaker 2

They include states like California, New York, Florida and Texas, for example, that are expected to gain quite a bit of the infrastructure build funds.

Speaker 10

Thank you. And last one also related to this topic. How you think about buying the companies versus doing joint ventures when you approach those opportunities?

Speaker 2

So I'd say first we look at, are we going to build buyer partners? So it's do we build it internal and can we do that under And get there in the timeframe that is needed to deliver our customers' mission. 2nd, we look at should we partner? Is it an area that It's core to our company and if it's not core, then we'll go to a partnership route. And then third is, if it's a core area of our Company, we do a GAAP analysis and we specifically outline what technologies we need to be able to continue to move up the solution integration value chain and be able to bid and win and prime larger contracts.

Speaker 2

So that's kind of our standard criteria. From a joint Venture, I would say, while we do joint ventures, we've started to reduce the number of joint ventures that we do. We will only joint venture in instances Where a customer really wants that or where it's required for past performance to win a contract.

Operator

This is all the time that we have for questions. I would now like to turn the call back to Dave Spiele for closing remarks.

Speaker 1

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

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Parsons Q3 2023
00:00 / 00:00