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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. David Spille, Vice President of Investor Relations. You may begin your conference.

Thank you. Good morning and thank you for joining us today to discuss our second quarter 2019 financial results. Please note that we have 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 a registration statement on Form S-1 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. I now will turn the call over to Chuck.

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 and 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 31st. 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 QRCs products. Additionally, we plan to leverage Parsons artificial intelligence and data analytics capabilities into QRCs 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…

Thank you, Chuck and good morning everyone. Today I will organize my remarks in the 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 a 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…

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 achieve the 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 1.4 book-to-bill and critical infrastructure at a 1.0 book-to-bill. Our 6.4% organic growth 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 work 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 on our ballistic missile defense system contract with the Missile Defense Agency in key areas, including cyber, command and control for military sales, and target and countermeasures. We won more than 140 million of new contracts for cybersecurity, software development, data analytics, system engineering and integration, and mission system 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 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, with a multi-billion dollar water transfer project to improve sustainability and reliability of the water supply for human…

Thank you, Carey. In summary, in Q2 we delivered solid revenue growth, expanded margins and continue 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 our strategy and drive shareholder value. Now, we'll open the line up for questions.

[Operator Instructions] Sheila with Jefferies, your line is open.

Thank you. Good morning everyone. 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 in the second half?

Surely, this is George. I'll take that. 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 remark is in the critical infrastructure segment; 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're 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.

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

Yes. Let me start off with that. Then I've Carey to take that. So, 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 work will continue as the threat continues to evolve and expand, and this an area of increasing services going into the future. Carey, anything you'd like to elaborate.

Sure. As Chuck pointed out, the United States sees 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 to counter-hypersonics work for over 10 years including hypersonic 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 space and missile defense command we're also providing engineering and test support for the development of offensive hypersonic glide of the air force [ph].

Great. Thank you.

Cai Rumohr with Cowen & Company. Your line is open.

Yes. Thanks so much and nice operating results. So to go back to cash flow – so before customers who were like, how much was the shortfall in total?

Shortfall in total was about the $35 million. And it split about equally, Cai, between the single Middle East plant and three in North America.

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?

Yes. It's 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 cause the shortfall in Q2. And we have a long history of significant cash flow strengthening in the second half. So we'll remain confident that we will achieve that target.

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

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

Got it. Thank you very much.

Thank you, Cai.

Matt Sharpe with Morgan Stanley, your line is open.

Good morning, a nice quarter.

Thank you.

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's steadily risen as a percentage of revenue here. You've guys have traditionally trended below 1%. But I think for the quarter you're up to 1.5% given the sort of the pivot of portfolio to more solutions or somewhat product oriented offerings. How should we think about the profile going forward here? Is it going to continues to gravitate upward? Or should it sort of normalize back down towards the 1% or so level?

I would say, short term it probably would run a little bit higher with the reasons you mentioned. In addition to that we've also had a cycle currently the number of significant office leases coming up for renewal. In a few cases we work through the process of relocating which is resulted in a bit more tenant improvement capital expenditures. And then in addition to that, we're also kind of wrapping up the implementation of a human capital management system which is also increased our capital additions recently. But longer term 1% is a good model, as revenue grows the number will be higher. But that that is the number relationship to revenue is a good number.

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

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

Got it. Thanks.

Tobey Sommer with SunTrust, your line is open.

Thank you. I was wondering if you could describe the company's qualified kind of pipeline and other forward indicators in contract activities that you're tracking. And how it distributes between the two businesses where the pockets of the greatest strengths are and where the opportunities could use some improvement? Thanks.

Sure. Our total qualified pipeline is over 20 billion. Our pipeline in total is over 30 billion and 20 billion 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 enough federal segments. There are specific market areas, still include cyber, also electronic security systems, cloud computing and we do have some in the engineered systems area.

From a kind of 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 the recent acquisitions? Thanks.

Yes. I think the – any time you go through a change like we did there is some apprehension going and 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. Combining that with the environmental, social and governance and sustainability items that we're working on in, I would describe our workforce as motivated and ready to continue to work for customer's mission.

Thanks. I want you to elaborate on one of the other previous questions with respect to acquisition targets since how you mentioned that in many cases these are partners of horizon [ph] contract that you've acquired. On average historically how long have you had your acquisitions target just kind of working partners prior to deal?

I think if you are on average it been over a year and in some cases several years that we work 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 -- in our case, we bring often their capabilities to our contract and oftentimes just opportunities for them to bring our capabilities in their contracts, so on that generally takes us a while. So to that extent we always have a pretty robust pipeline of opportunities that we're looking at it any given point in time.

And if I could sneak one last one. Just decline in interest rates that all changed your – the way you think about leverage, your appetite for acquisitions? Thank you.

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

Thank you very much.

[Operator Instructions] Gavin Parsons with Goldman Sachs, your line is open.

Hey, good morning, everyone.

God morning, Gavin.

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

So, the way -- and 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 affirming up of out-year revenues. So, as our forecast that we do internally, we're at pretty much in all time high as it relates to not only the amount of current year and subsequent year revenue kind of 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 multiyear and so they have a probably 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.

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

Yes. In summary, the operating margins of our federal solutions continue to increase. As we said, if federal solutions becomes a bigger component of the overall corporation than obviously it then consumes a larger portion of corporate G&A. And now it's nearly 50% of the company. And we're seeing strong performance of our portfolio. We continue to run off contracts of lower margin or higher pass-through cost. We 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.

Great. You mentioned you're pursuing larger contracts there. I imagine that's both kind of a function of the customer footprint and task performance, so kind of added acquisitions. But is there also kind of benefit of scale where you're not able to kind of leverage kind of across the business or customer sees you as a bigger entity and thus able to work on bigger contracts? Thanks.

Yes. So I would say its scale, but at scale really from our perspective of how put the portfolio together. Through the acquisitions we've been to drive end-to-end solutions. So we've been very careful about the companies for 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'd say before we were going after smaller contracts today we can watch for very large contracts because we cover other customers a broader mission portfolio.

Great. Thanks.

[Operator Instructions] Edward Caso with Wells Fargo, your line is open.

Hi. This is Justin Donadio [ph] on for Ed. Thanks for taking my questions. First one I had just given QRC's 30% plus EBITDA margins, can you talk about the step-up in margin in both federal segment and the overall business that that provides?

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 will 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. A 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.

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? Has there been any large recompete contracts that you may have lost or have there been some significant takeaways that you've won this year?

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 changed that would give us a more lower view into the future. On the tailwind side, having a federal budget in place, although there 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'll be money available to award. And we have had some large takeaways. And Carey, you might want to go into couple of those?

Sure. Just to expand on what Chuck said. We also do have a 100% recompete win rate within federal solutions, which I would credit to our performance 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're awarded two of the functional areas. And we're the leader in both functional area, despite the fact that there are five awardees we've won the majority of the work.

All right. Thank you for the color. Appreciate it.

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.

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'll end today's call. Have a great day.

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