Good day and thank you for standing by. Welcome to the Fourth Quarter 2021 Parsons Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference maybe recorded. [Operator Instructions] I'd now like to hand the conference over to David Spille, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us today to discuss our fourth quarter and fiscal year 2021 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, our President and CEO; and George Ball, CFO. Today, Carey will discuss our corporate strategy and operational highlights and then George will provide an overview of our fourth quarter financial results and review our 2022 guidance. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. 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, 2021 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.

Thank you, Dave. I want to welcome everyone to Parson's fourth quarter and fiscal year 2021 earnings call. We had a strong finish to the year and achieved our fourth quarter and full year 2021 objectives as we delivered encouraging second half growth over the first half, maintained our hiring and retention momentum, one large strategic contract awards and continue to be recognized for our ESG business performance. These accomplishments support our strategy to achieve top positions in high-growth markets and move up the value chain as a solutions integrator. As a result of our strategic evolution from a services to a solutions company, our portfolio is well positioned in high-growth markets, aligned with macro environment trends and well balanced across infrastructure, defense and intelligence. Our Critical Infrastructure segment is benefiting from increased spending on global infrastructure, including transportation, environmental remediation and water and wastewater treatment. We also expect a gain from the United States Infrastructure Bill that was signed in the law in mid-November. At the same time, our Federal Solutions segment is providing crucial national security support to our customers in cyber, space, missile defense and C5ISR in an increasingly tense geopolitical environment. And finally, we're establishing measured 2022 guidance that supports revenue growth of 4% and 20 basis points of adjusted EBITDA margin expansion at the midpoint. During the fourth quarter, we delivered on our stated objectives, including strong core program performance, large contract wins and continued momentum in employee recruiting and retention. In addition, we were recognized as an employer of choice and for delivering projects with a positive impact on the environment and society. Our strong finish to the year enabled us to achieve second half revenue growth of 9% over the first half of the year with 7% organic growth and to deliver results…

Thank you, Carey. As Carey indicated, fourth quarter results were highlighted by delivering on our financial objectives, strategic contract wins and increased hiring activity. Today, I'll focus the majority of my remarks on year-over-year comparisons but will also include commentary on second half 2021 results compared to the first half of the year. Total revenue for the fourth quarter of 2021 decreased 1% from the prior year period and was down 6% on an organic basis. These decreases were driven primarily by a reduction in pass-through revenue as well as project completions and transitions. Total revenue for the second half of 2021 increased 9% over the first half of the year and was up 7% on an organic basis. These increases were driven primarily by improved hiring activity, seasonality of the business and a reduction in write-downs. I would note that these growth rates are considerably higher than those experienced in prior year periods. As such, we are encouraged by momentum in our core business. SG&A expenses were relatively unchanged from the fourth quarter of 2020. And second half 2021 SG&A expenses were up 2% compared to the first half of the year, due largely to costs associated with our BlackHorse and Echo Ridge acquisitions. Adjusted EBITDA of $91 million increased 1% from the fourth quarter of 2020 and adjusted EBITDA margin increased 20 basis points to 9.6%. These increases were driven primarily by the impact of acquisitions and stronger program performance. I'll turn now to our operating segments, starting first with Federal Solutions, where fourth quarter revenue increased by $40 million or 9% from the fourth quarter of 2020. This increase was driven by acquisitions as core business revenue decreased 2% on an organic basis in the quarter when compared to the prior year period. However, Federal Solutions revenue…

Thank you, George. I'm pleased with the way we finished 2021. We delivered on our objectives for the second half of the year and our team's hard work enabled us to increase hiring activity, drive strong win rates and grow contract awards and backlog to $4.6 billion and $8.3 billion, respectively. These levers will enable us to drive growth, enhance margins and increase long-term shareholder value. With that, we will now open the line for questions.

[Operator Instructions] Our first question comes from Tobey Sommer with Truist Securities.

Hey, good morning. This is Jasper Bibb on for Tobey. Just on the revenue guide, I wanted to ask how much of a headwind you have this year from the legacy CI projects are letting roll off? And do you think they'll be effectively finished exiting that work by year-end?

Yes. The rollout projects have already completed. The pass-through were done in 2021.

Okay. And then how should we think about higher oil and commodity prices impacting the CI segment. Does that matter for your exposure to the Middle East or are there other ways that might impact the business?

Great question, Jesper. The oil price is now approaching nearly $100 a barrel, that's actually helping our Middle East business quite a bit. We anticipate quite a bit of growth, particularly in Saudi Arabia. They're building out new industrial cities, two of which are NEOM and Qiddiya. We were fortunate to win a program management contract and be on the ground floor of NEOM. That value is nearly $100 million but that effort is just going to continue. It's quite exciting when you think about how Saudi is going to transform like the UAE did about 30 years ago.

Got it. Last question for me. You've been one of the more active acquirers in the group. Is there an appetite or something materially larger than the historical deal profile in that sub-$500 million range or do you think the OCI issues might be prohibitive for something larger than that?

Well, first, we're pleased with where our leverage is right now at 0.8x. We'd be comfortable going to about a 2x to 2.5x or a stretch up to maybe 3x. We're going to continue to keep our strict acquisition criteria which is looking at companies that have achieved greater than 10% top line growth, greater than 10% EBITDA margin expansion. We'll also remain focused on continuing to build out our cyber and space end-to-end solutions capabilities. And we would entertain technology-related acquisition and critical infrastructure.

Okay. Thanks for taking the question. I'll take the rest offline.

Thank you.

Our next question comes from Gavin Parsons with Goldman Sachs.

Hey, good morning.

Good morning, Gavin.

Carey, a lot of your peers have really emphasized the impact of the contained resolution COVID impact, absenteeism, disruptions in customer order and awarding patterns. Is that something you're seeing? And if not, maybe why not versus the industry? And if it is, is that captured in guidance?

So first, I would say relative to COVID, that's become a tailwind for us. It was a headwind over the last couple of years but the two major programs that we were impacted on which is the FAA and Kwajalein starting to ramp back up. So those will benefit us as we go into 2022. Relative to a CR, our anticipation and hope is that there will be an omnibus signed but right now, we're not impacted by that yet and the reason is because we won so many single-award contracts. Those don't fall under the CR. So we're just trying to drive task orders and hiring. As long as we keep up our hiring momentum, we anticipate good results. And then on customer awards, I would say Q4 for Federal is traditionally slow. Obviously, we had very strong book-to-bill, our fifth quarter straight for Critical Infrastructure. But our proposal center right now is about the busiest it's been for Federal. So we're pleased to see all the RFPs up.

Got it. Okay, interesting. And maybe on the 3% recompete rate, what's your contract completion rate or your GoGet and guidance for this year relative to kind of where we were at this time last year?

Our new business, GoGet, is pretty much consistent with what it was in prior years, historical years and our recompete late rate is much lower.

Great. And then maybe last one on margins. The 8.7% EBITDA margin guide, if I just take your 2021 performance and strip out the charges, that's closer to the low to mid-9% range. So any help on the walk there would be appreciated.

Yes. So I would say, first, we're taking a very measured and balanced approach to guidance. And the reason is because there are macroeconomic uncertainties such as inflationary pressures and the duration of the CR. We're very confident in our ability to expand margins. We've been able to expand margins 180 basis points since 2018. And we've been able to do that through multiple means; one is by moving up the solutions value chain to a better mix of work; we've also been able to acquire companies that have been higher EBITDA and again, we'll have improved our performance execution and we plan to continue that as we go into 2022 and continue to control costs. So we believe with those levers that we will achieve our guidance but again, we're just really taking a measured approach.

Great. Thank you.

Our next question comes from Greg Konrad with Jefferies.

Good morning.

Good morning.

Maybe to follow up with a couple of the last questions. I mean it doesn't seem like in 2022, you have much in the way of headwinds included in the guide, whether COVID, the pass-through runoff or just other items? I mean, are there any headwinds to kind of call out in 2022? And then, maybe thinking about the growth drivers, any key contracts or lease program areas contributing to that growth?

Yes. So again, I would just say it's really macro environment uncertainties is what we're planning for. The only major contract that is completing would be the salt waste processing facility. That run rate was roughly $65 million a year. We were able to offset that. In fact, we offset it within that same business unit because we won the Radford program and also Kwajalein is returning post-COVID. So as we head into 2022, again, we do believe COVID's behind us and it won't be helping us for next year.

That's helpful. And then just following up on infrastructure, I mean, for a while now, we've been stressing an Infrastructure Bill which we don't really have yet but it seems like you had a lot of positive commentary around that. I mean, how are you thinking about the pipeline from here and maybe catalyst for that to be a needle mover?

Sure, Greg. So from a planning perspective, we have put it into our 2023 plan. We anticipate that funds could start to flow late 2022. There are basically three buckets: There's the formula funds that get rolled out to the various states; there's existing grants and there are new grant programs. The formula funds and the existing grants can roll out now, they'll be held at last year's level until the CR is approved. The new grants won't start up until later. So our focus really is on working -- the programs that are going to come out of the formula funds and the existing grant programs. And again, across our three focus areas of transportation, environmental remediation and water and wastewater treatment, our portfolio aligns very nicely with the Infrastructure Bill.

And then just last one for me. I mean you mentioned a nice step up in hiring in the second half. I mean what are your thoughts around general inflation? Is that a headwind/tailwind for the business, maybe just thinking about dynamics around cost plus and just in general, what you're seeing around inflation?

Yes. So I would say, again, that's why we're really taking a measured approach to guidance. Inflation is one of the macroeconomic uncertainties. Last year, we had about a 2.7% labor escalation. This year, we're planning for slightly over 3% but we do want to be cautious given the uncertainties that exist.

Thank you.

Thanks, Greg.

Our next question comes from Cai von Rumohr with Cowen.

Yes, thanks so much. So Carey, could you review for us your problem programs in Critical Infrastructure that are ending? What's the status? What's the risk that we might take an adjustment there?

Sure, Kai. So the majority of the problem programs are behind us. First, these are legacy programs that were bid in the 2015 to 2016 timeframe; all were awarded prior to 2019. We've really shift our focus for the business. We're focused on owner's engineer and design engineering work which is really our core competencies and not bidding programs that are hard bid construction or entirely pass-through. We've also put a lot of derisking measures in place and we're pleased actually with the performance that we had this year as we put a lot of those programs behind us in the rearview mirror. So as we go into 2022, there are only three remaining. One is going to wrap up this quarter. The second one will be the end of 2022 and the third one will be middle of 2023.

Got it. And I mean, is there risk in those that we could take another charge as we exit them?

Well, there's always unknown unknowns but per GAAP accounting, if there was a risk that we knew about, we would have had to take a charge during the quarter.

Excellent. And then the Fed IT bookings environment has been weak. And while you have a good backlog going into the year, can you talk about what you're looking for, for the Fed Solutions book-to-bill in the first quarter? Should we be cautious about that or are there some offsets?

Well our trailing 12 months for Federal has been at 1.3x which we're pleased about. We've also taken a pretty conservative bookings approach, as you recall. For example, if you look at some of the programs that we were awarded this quarter, we don't book at full value. We're basically booking as we receive funding. I mean, a great example would be the DHS win. That's over $100 million. We've only booked $8 million. A lot of our single award IDIQ contracts that we were awarded last year were basically the same. We only booked the base year. Even our teams recompete. We only booked the base share, not all seven years. So that said, first quarter doesn't always tend to be our strongest but I'm pleased with the proposed activity that's underway.

Got it. And then last one, if you look at M&A, you clearly, I think, has been pointed out; you still have a strong balance sheet. That's still a priority. Talk about your pipeline. Are you seeing anything? Is it hot that we should expect there's a good chance of a deal this year? And is it more likely to be a tech niche filler or something relatively large?

So based on the leverage ratios I cited earlier, we could go up to about $750 million type of acquisition and be very comfortable. Our pipeline's very robust within the criteria that I mentioned, continuing to look at companies that give us the end-to-end solutions in cyber and space or a technology company within Critical Infrastructure. You can expect us to do one to two deals per year as we have consistently and these are not accounted for in our guidance.

Got it. And so, I mean, are they the comparable size of the recent deals or I guess someone asked the question before, are any of them larger?

I think you can expect us to do a comparable size as to recent deals.

Okay, excellent. Thank you so much.

Thanks, Cai.

[Operator Instructions] Our next question comes from Mariana Mora with Bank of America.

Good morning, everyone.

Good morning.

So my first question is a follow-up to Cai's question on M&A. How is the macroeconomic uncertainty affecting due diligence and decision-making on the deals you have in the pipeline?

We'll continue to do M&A. I would say the companies that we're looking at are similar companies to ourselves which are predominantly solutions providers. So we'll continue to look at it as we have. We will factor in areas like inflation and just make sure that we've assessed that as part of our diligence process.

And then the other one is, can you give us some color on how important is the on-contract growth as a factor of your like growth range in top line? And what I'd like to understand as well is like how much of that is just execution, how much of that is determined by hiring? And how much is depending on like task ordering?

Sure. So we do account for on-contract growth in both of the segments. It's a little different between the two. In the Federal side of the house, it will mostly be through these large IDIQ contracts that we've won, where we're moving task orders over and that's dependent on getting the task orders and the hiring. On the critical infrastructure side of the house, on contract growth is a regular occurrence on all those contracts.

Great. Thank you very much.

Thanks, Mariana.

Our next question comes from Louie DiPalma with William Blair.

Carey, George and Dave, good morning.

Good morning.

For Federal Solutions is activity increasing as it relates to missile defense and space surveillance reconnaissance in the context of the rising geopolitical tensions. And I know I think it was in December, you announced a contract win for project Blackjack associated with your Braxton Science's acquisition for ground stations. But what is the potential with these rising geopolitical tensions for you to leverage that project Blackjack win for like a larger contract win with the Space Development Agency and some of the large constellation that they're building for hypersonic missile defense?

Yes, great question, Louie. On the missile defense side, we have the teams contract that we won which is the engineering contract. And again, that does have a 40% surge cost which we're not counting on right now but they do have the ability to exercise that, should they need it. Our large focus there right now is in hypersonic defense and building the space surveillance sensor layer to prevent hypersonic missiles. On the space surveillance side and the DARPA Blackjack awards specifically, that's for ground stations for small satellites. There's going to continue to be a lot of small satellites launched because disaggregation of satellites is one of the best resiliency means. And Space Development Agency is at the forefront of that which will eventually be rolled into Space Systems Command. So we do see that as a potential growth area for Parsons. Also our Space Situational Awareness contract that we were awarded last year had additional capacity in it. As you start to look at not just tracking things in space but you look at potential weaponization of space, you look at space debris from some of the recent incidents that have occurred, we expect continued focus on that for the space area.

Great. Carey, you discussed in response to several questions how you have now completed the churn of nearly all of your low-margin construction contract. So as a result, should we for the critical infrastructure organic revenues to turn the corner this year and to have flat to positive organic growth?

Yes. We expect growth in all four of our business units in 2022.

Great. And one final one. Earlier this month, you announced a partnership as it related to PFAS water contaminants with Battelle. I hope I'm pronouncing that correctly. Can you discuss the larger PFAS opportunity? And how Parsons is positioned as it relates to the Infrastructure Bill?

Yes, Louie, the agreement we announced with Battelle is strategic for us. We'll be able to use that in both the critical infrastructure and the Federal segment. It's a great example, by the way, of where our two portfolios are very synergistic. On the Critical Infrastructure side of the house, the big focus area are many companies that have actually been sued for the contaminants. So that's where we're prioritizing. On the federal side of the house, the majority of that PFAS work will come through military installations. And we're still awaiting final EPA regulations which will even speed that up more. Right now, there's various states that are moving forward but once it's better regulated, they will be more in demand.

Awesome. Thanks, Carey. Thanks, George and Dave.

Thanks, Louie.

Our next question comes from Josh Sullivan with The Benchmark Company.

Hey, good morning.

Good morning, Josh.

Just a question or a general question on inflation. Do you have any early thoughts on the upcoming Presidential defense budget request? How do you thread that needle between funding growth and backfilling on inflation?

Yes, I would say it clearly is going to be some impact from inflation because it has not been fully factored in. But based on the numbers that are being tossed around for FY '23, it's looking more positive than I would have said we would have expected when the administration took over.

Got it. And then just on the hiring momentum that you mentioned, what was proven to be the differentiator? How do you keep that going? How much of your workforce is going to remain remote? Just curious on some of the overall hiring practices in this environment.

Yes. So I think it's multiple things. First we did hire a new head of CHRO as well as new HR leadership back in July. That's made a big difference for us. But I also would say it's the Parsons' employee value proposition. It's our culture which is one of agility, innovation, collaboration. We kind of have the breadth and depth in many areas like cyber space of a large company but we've got the agility and responsiveness of a small business entrepreneurial company. We're also very flexible on work location if people want to work remote and their customer permits it, their manager permits it, we allow that or if they want to work hybrid or if they want to be in an office. So we're very flexible there. And we have other unique things we offer, such as a true dual technical career path where people can go all the way up to a level of a technical fellow or a Chief Technology Officer. So they're technical, they don't have to go into management. So I think it's -- I'd say the collection of the things that relates to our employee value proposition plus the new leadership that we brought in in the HR team.

Got it. Thank you for the time.

Thanks, Josh.

[Operator Instructions] Our next question comes from Gavin Parsons with Goldman Sachs.

Hey, thanks for the follow-up. I know we don't have a fit up but any early thoughts on kind of the growth rates beyond '22? Is that a pickup from 2% organic?

At this time, we're not sharing long-term guidance. We plan to do so at an upcoming Investor Day. Our focus is really on doing what we did in the second half of 2021, delivering and executing and making sure we achieve our 2022 guidance.

Got it. And then you guys talked a lot about the pipeline more than $100 million. What about the pipeline, say, I don't know, bigger than $1 billion? How many contracts of that scope are you going after you have the capacity of your appetite to pursue those? I think maybe a good example in Critical Infrastructure but also to hear your thoughts on Federal Solutions.

Yes. So we're selective and make sure that when we do pursue those that we will win those and we've done that with two for two so far this year which would be the team's contract and that was our biggest contract at the time. And then the follow-on Faro but we definitely will pursue contracts that are greater than $1 billion?

Do you know off the top of your head, how many are in that pipeline you've discussed?

Approximately 5% to 10%.

Okay, great. Thank you.

Thank you.

That's all the time we have for questions today. I'd like to turn the call back 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 today's conference call. Thank you for participating. You may now disconnect.