Good day, and thank you for standing by. Welcome to the Second 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 session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your speaker today, Dave Spille, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our second quarter 2023 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our second quarter financial results and a review of our 2023 guidance. We then will close with a question-and-answer session. Management may also make forward-looking statements, during the call, regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that, such statements are not guarantees of future performance, and involve risks, and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These Risk Factors are described in our Form 10-K for fiscal year ended December 31, 2022, and other SEC filings. Please refer to our earnings press release for Parsons complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now, I’ll turn the call over to Carey.

Thank you, Dave. Good morning, and welcome to Parsons second quarter 2023 earnings call. I am very pleased with our results again this quarter. Our momentum continues as we delivered another record quarter with all time highs for total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. In the second quarter, we achieved organic revenue growth of over 20% in both business segments and won six contracts over $100 million, all company records. Our record growth was driven by winning key contracts in both segments, ramping up new contract work, growing revenue on existing contracts, and record employee hiring and improved retention. In addition, our successful M&A program is contributing to growth by enhancing our ability to win large strategic contracts with differentiated technical solutions. I will also note that for Q2 and the first half of 2023, total adjusted EBITDA growth exceeded revenue growth. In the second quarter, total revenue increased 34% while adjusted EBITDA grew by 53%. And for the first half of 2023, total revenue grew 29% and adjusted EBITDA increased 38%. Our ability to drive adjusted EBITDA growth faster than our strong revenue growth demonstrates our focus on margin expansion. We have the right portfolio and the right team to continue to capitalize on unprecedented global infrastructure spending and the increasing demand for national security solutions, especially in high priority growth markets such as cyber and intelligence space, electronic warfare, information operations, and artificial intelligence, all of which address near peer threats. These positive factors provide us with a confidence and visibility to raise our full year revenue adjusted EBITDA and cash flow guidance, which Matt will discuss in a few minutes. During the second quarter, we achieved a book-to-bill ratio of 1.4 times on an enterprise basis. These results were driven by…

Thank you, Carey. As Carey indicated, our second quarter was highlighted by record results in the number of areas, including total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. Total revenue of $1.4 billion for the second quarter of 2023 increased 34% from the prior year period and was up 23% on an organic basis. Organic growth was driven by the ramp up of recent contract wins and growth on existing contracts. In the second quarter, our acquisitions contributed approximately $121 million of inorganic growth. As a reminder, our Xator acquisition closed at the end of May 2022, so only June 2023 results are reflected in our second quarter organic growth. SG&A expenses for the second quarter were 16% of total revenue compared to 20% in the second quarter of 2022 due to a continued focus on efficient growth across the portfolio. Adjusted EBITDA of $118 million increased 53% from the second quarter of 2022. This increase was driven primarily by volume on new contract wins and the incentive fees from the chemical weapons destruction programs, as well as contributions from our Xator acquisition. The year-over-year 100 basis point margin improvement to 8.7% was driven by recent contract awards or Xator acquisition and operating leverage. I’ll turn now to our operating segments. Starting first with Federal Solutions, where second quarter revenue increased by $225 million or 42% from the second quarter of 2022. This increase was driven by organic growth of 20% and $118 million from Xator. Organic growth was driven primarily by expansion with Department of State growth on new and existing contracts and the incentive fees previously discussed. Federal Solutions adjusted EBITDA increased by $38 million or 80% from the second quarter of 2022, and adjusted EBITDA margin increased 230 basis points to 11.2%. These…

Thank you, Matt. I’m very pleased with the performance of our company over the last two years. We continue to be one of the top leaders in organic revenue growth in both of our segments. Given our strong awards, revenue and adjusted EBITDA performance, we are raising guidance for all three of our financial metrics. Looking forward, we have a company with a unique portfolio that is well positioned in two complimentary business segments. All six of our end markets are growing, and we continue to win new business in each of them with company record win rates. As a destination employer, we’re exceeding hiring and retention goals as employee seek to work for a firm that combines value-driven mission with an entrepreneurial culture. Our M&A program continues to be successful and the companies that have joined the Parsons family have strengthened our technical differentiation and moved us up the value chain. Thank you to all the Parsons employees for their dedication and support of our customers’ missions. With that, we will now open the line for questions.

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

Thank you. Can you hear me?

Yes.

Good morning, Tobey.

Hey, Tobey.

Thanks. Good morning. I was wondering if you could describe the factors that would explain, what looks like by my math at least sequential top line declines, implied in guidance in 3Q and 4Q. Is there something seasonal or some work that was completed in the quarter that would help us understand that?

Yes. Tobey, so if we’re looking at the second half specifically, we’ve talked a little bit in prior calls about the – some headwinds related to quadrillion, specifically that program completed that peaked in Q3 of last year, so that’s a bit of an impact. We also, to your point, have seasonality through the summer months, obviously a good portion of our growth has been driven by Middle East and some of the Department of State work. So we have some summer months where the seasonality adjusts a little bit. And then obviously the Q4, we have a little bit of budget uncertainty with things go well and we continue down the hiring trends. We’ll kind of trend toward the high end, but right now, the midpoint we’re pretty comfortable.

Okay. And then from a modeling perspective, is there – as we look into 2024, does the non-recurring fee that you described in the third quarter, does that provide a real significant headwind to EBITDA growth next year?

No, we don’t believe, it does, Tobey. We’re still on track with our long range targets that we provided at the Investor Day.

Yes. So Tobey, I would say, if you think about the federal and CI businesses, as we’ve mentioned before, federal, we typically are in the high 8s, low-9s from a margin perspective, our goal by 2025 is to get the CI business over 9%. So I would say, somewhere in those ranges is a fair number.

Okay. And last one for me if I could, what does the cadence of recompetes look like over the next couple years, having recently kind of won and retired some pretty significant recompete risk? Thanks.

Yes. Tobey, for the rest of this year, it’s 1%, and for next year it’s 9%. We’re very proud of the fact that we won all four major recompetes and particularly pleased with the duration of those programs spanning seven to 20 years.

Thank you very much.

Thank you.

Our next question comes from the line of Bert Subin with Stifel.

Hey, good morning and congrats on the strong results in the quarter.

Thank you, Bert.

Thanks Bert.

Matt, maybe just a follow-up to comments there to Tobey, absent the project right downs in the quarter, I think your CI adjusted EBITDA margin would’ve been over 10%, something like 10.3%, which would imply you’re already outpacing that 9%-plus CI margin target. So is that just a one-time thing? Was there something, I guess, beneficial in the quarter outside of the headwind you had from the $28 million project write-downs?

Yes. I would say, I think to your point, Bert, we’re starting to see the core business within CI is executing. As Carey mentioned, we have that one program wrapping up in early Q4, it’s kind of slipped into October within the quarter. And then the second one will be middle of next year. So again, it’s – the core business is executing where we expect it to be longer term. It’s really king of getting through these challenge programs. So again, we feel comfortable with targeting CI and the low-9s over the next couple of years.

Yes. Just to add to that, so as you mentioned, we were about 10.2 pro forma for the quarter for CI margins for the first half of the year, we would’ve been an 8.7 pro forma. We are fortunate, one of these programs is very close to wrapping up. In fact, we’re in the final punch list stage for that. That’ll complete in Q4 – early Q4 of this year. And the second program, we had terrific results this quarter in terms of demonstrating some key technical requirements, which gives us confidence in the end of 2024 date.

Got it. Maybe more like a high level question for you, Carey. If I look at the recent success, you’ve won up a ton of contracts in the FS side, a lot of success in CI, both in North America and the Middle East. It’s created a pretty impressive organic growth setup. I think the main risks to that were hiring around some of the new contract wins on FS, and particularly things that involve cyber classified work and then these legacy projects. How should we think about, I guess, both going forward? On the hiring front, do you see a pretty good path to hiring, those classified – cleared individuals? And then on the legacy projects, are you pretty comfortable this is sort of the last writedown related to these projects?

So let’s take the – your last part first. On the legacy projects, we obviously can’t predict unknown unknowns, but as of this point, we’ve guided to where we think we are at the end of this quarter. And again, it’s – the both programs are demonstrating completion progress and nearing the end, one at 95% complete, one at 75% complete. On the hiring, we’ve been doing a great job across the board. We have increased net headcount in all four of our business units, including the cleared segment. We’ve also done a terrific job on retention. And year-over-year, our retention improved by 2%. So our HR department and all of our business units have been doing a great job of attracting and keeping quality people within Parsons.

Great. Thanks, Carey. And just one final question. Can you give us any update on how you’re thinking about PFAS, PFOS, I know that had the potential to be a tailwind. Do you think that’s being moved up to 2023 or is that still more a 2024 story? Thank you.

Yes. We are starting to see more demand for PFOS, PFAS, as you’ve seen in the news with particularly some of the industrial and manufacturing companies. When we look at the addressable market for that, it’s about a $200 billion addressable market out of which Parsons service addressable market is around $45 billion. So we’re involved mostly today’s still in the investigations, and then we’ll get more involved in remediations as time goes on. With the increasing standards that are being put in place by the government, we expect to see that accelerate as we look over the next couple of years.

Great. Thank you, Carey, and thanks, Matt.

Thanks, Bert.

Thanks.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Good morning guys. Thank you so much. So I just wanted to ask on the top line, first off, like great quarter on every single metric possible. So if you could just talk about what’s going on with the top line great organic growth of 23%. Are you guys changing the way you win business? How much of it is coming from your addressable market getting bigger? It seems like CI has some major tailwinds as well, but you guys are also doing the right thing. So if you could talk about just your update – updated guidance, how much of it was tied to new awards versus on contract growth versus hiring coming in better. And then I’ll have a follow-up.

Yes. Sheila, good morning. So we’re very pleased and I’d say, all four of the business units and all six of our end markets have been hitting on all cylinders. What we’ve done, probably if there’s one change, we’ve moved up the value chain as a result of inorganic investment and inorganic M&A. So being able to string together capabilities end-to-end has allowed us to win significant jobs like the $1.2 billion GSA job that we were awarded. We’re also very selective on what we bid and we’ve delivered extremely high win rates record for the company at 72% year-to-date. Addressable market, again, it’s really back to our six core markets. We’re in cyber and intelligence, space and missile defense, transportation, environmental remediation, urban development, and critical infrastructure. And we’re at a fortunate time that all of the compound annual growth rates are increasing between 5% to 12%. So all we have to do is really stay laser focused on the six markets, the customers that we have, the capabilities that we deliver, and continue to move up that value chain and win – bid and win bigger programs. This year, year-to-date, we’ve won 10 jobs greater than $100 million that pairs with 11 for the full year last year. So we’re in a very strong trajectory. We’ve seen both new business wins as well as on contract growth across the board. And hiring is, again, it’s stronger this year than it was last year, which was already a very good year and retention’s improved by 2%.

Got it. That’s super helpful. And then maybe you mentioned some of these already, so as we think about the second half, what really comes off on the organic decline with the – well, not organic decline, but only up 10 and up six as we think about Q3 and Q4. How does the FAA contract ramp factor in there and then the GSA win as well?

Yes. So Matt mentioned earlier, we have a headwind from quadrillion of about $55 million, and there’s a couple of small contract completions. We have factored in government budget uncertainty, particularly on the federal side. And we do have tougher comparables. FAA to your point, does have seasonality, that’s positive that we factored in increasing for the second half.

Great, thank you.

Thank you.

Our next question comes from the line of Cai von Rumohr with TD Cowen.

Thank you very much. So wow, great quarter. Congratulations, really.

Thank you, Cai.

Could you maybe help us kind of reset, given the numbers were so big, where you expect to be at your midpoint at both the fed systems and Critical Infrastructure?

Yes. So for the total year, we expect to have 18% growth and 12% organic. And Matt, you want to share the federal so.

Yes. So for – let me look…

54% federal business and 46% CI.

Okay. That’s very helpful. And then so it seems maybe too much to ask, but what are the bookings look like in the third quarter? Because seasonally this is pretty good for the defense IT sector, and I think your historicals are for the Q3 at 1.3, and you’ve been over one and every year since 2017. So what are we looking for bookings in both sectors in the third quarter?

So what we’ve planned for the rest of the year would be just slightly below 1.0. We do typically to your point in the third quarter, see very strong federal bookings. And again, if the Critical Infrastructure volume continues based on global infrastructure spend that should already remain strong. We – I did point out earlier, we’ve won 10 contracts greater than a $100 million year-to-date, and we already won one of those in the third quarter that we’ve announced. That was the NASA ROME contract for $130 million.

Got it. And then so you’ve raised your adjusted EBITDA significantly, you only increased the cash flow by $5 million. Maybe it’s kind of a picky question, but how come not more?

Yes. Good question, Cai. Obviously, I think through the first half, we’re a little bit behind, I guess, I would say, from where we had planned. We – I mentioned on the script that we were – we had a couple very large links that were collected early in the third quarter. We’re probably the high end is kind of what we’re hoping for, but given some of the uncertainty, obviously 35% growth in the Middle East year-to-date. There’s a little bit more uncertainty around the Middle East billings and collections. So I’d say, if things go well, we do have to do almost $300 million in collections or in cash in the second half. So it’s just kind of coming up with a estimate that we’re confident in.

Terrific. And last one, given how fast you’re growing, what’s your appetite for M&A? I mean, you’re growing so fast organically, can you basically deliver on that as well as do acquisitions? Are you basically cooling it for the moment on acquisitions?

We still intend to do acquisitions. We really believe that’s been a critical part of our growth story, moving us up the value chain as a solutions integrator, being able to bid and win larger jobs. So we plan to continue, we’ll keep the same high bar, so it – we need to look at companies that are growing greater than 10% top line, have greater than 10% EBITDA margin. We’re going to continue to be very selective. I think if you look at Xator being the most recent acquisition and what they’ve been able to deliver. It’s going to be companies like that are really going to be able to contribute to our growth and couple into our capabilities and make us stronger to be able to win more business. On the federal side, we’re going to look at companies in area of cyber and space, and particularly around areas like defensive cyber or critical infrastructure protection. On the critical infrastructure side, we’re also going to look at areas of geographies, because if you look at how the infrastructure spend is, the larger states are getting more of the money. So you can expect to see us double down there.

Thank you very much.

Thanks, Cai.

Our next question comes from the line of Andrew Wittmann with Baird.

Excuse me. Thanks for taking my question. I guess, your success in the federal awards front this year, not only with the recompetes, but with just kind of broadly with the awards is obviously notable here. I was just wondering in terms of the level of outstanding bids that you have not heard back on yet. How does that compare with earlier in the year? And does any of the uncertainty in the appropriations process that’s coming this summer fall? How does that affect the bidding velocity or the bidding pace that’s happening right now, Carey?

Yes. Thanks, Andrew. So we have $7 billion awaiting notice of award, which is a little lighter than last quarter because we did win so much. I would also point out though, we have over $12 billion of what I call unbooked ceiling value. So if you look at the way again that we do bookings and take for example, the FAA contract, that was a $1.8 billion award of which we booked $641 million. So the rest of that, you don’t see reflected in our backlog or bookings. It’s in that $12 billion of unbooked value. If you look at the appropriations process, we’ve gotten very used to dealing with uncertain budget environments, unfortunately, with continuing resolutions. And we’re able to run through those both based on that $12 billion of unbooked value. We’ve got obviously very strong $8.9 billion record backlog. And then 50% of our business is not subject to like the CR process, if you look at the amount that we have that’s international, state and local and commercial. So we feel confident we’ll be able to run for a while.

And Andy, I’d just add to your point, that $7 billion of awaiting notice of award, that’s – if we look back a couple years, that’s almost two times what our run rate was a couple years ago. So there’s still a backlog there, but it’s kind of trending in the right direction recently.

And Andy, we also have a $45 billion pipeline.

Great. Those are all the numbers I wanted. I guess, just, I think, you had a quick comment maybe I missed it on win rates. Carey, can you just kind of maybe elaborate on kind of what you’ve seen. I know it’s been good year-to-date. Is there any reason to believe that you’ve been doing better than expected or worse than expected or there should be any change in the win rates that you’ve experienced?

Yes. We’ve been doing very well year-to-date. I mean, I will say, if I look back over the last three years, almost consistently every year, we’ve improved sort of by 10% over the last couple years. This year we’re way up at 72%. And again, I think it goes back to our bidding process, it’s being very selective, it’s moving up the value chain and positioning early, working with customers. And a key point about our business is we look for emerging customer requirements. So we’re not a company that’s coming in and always trying to take somebody else’s market share, but rather how do we solve the problems of the future, like the near pair threat problems or how do you solve digital transformation within infrastructure? And I think that’s a key contributor to our success.

Great. Thank you very much. Have a good day.

Thanks, Andy.

Thanks, Andy.

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

Hey, good morning, great quarter.

Good morning. Thank you. Josh.

Just following up on that $12 billion of unbooked value, the international piece, how do we think of the Middle Eastern contract staging or cadence looking ahead, any large polls in the tent over the next 12 months?

Yes. So on the Middle East works, we’ve been successful to get on five of five of the giga-projects and those are going to continue to grow as they ramp up. The two biggest ones for us would be Neom The Line and also at Neom would be Oxagon Project and Qiddiya. So Neom The Line being the city that’s as tall as Empire State Building, as long as Long Island, their goal is to have 9 million people living there by 2030 totally sustainable city. And then Qiddiya being the largest entertainment city in the world just outside of Riyadh, and we have – we’re the delivery partner on both of those projects. So I would say, those are going to continue to see a ramp and they have kind of a long tail, because that vision runs to 2030. Then outside of Saudi and Dubai and Qatar, you’re seeing investment as well. So they have like the projects of the 50 and the UAE that’s been defined. There’s the Qatar National Vision, so those are strong.

Got it. And then as far as the sun setting legacy programs, are there any terminal costs we should think about outside of the writedowns?

I’m not.

No. I wouldn’t, nothing specific Josh, but it’s just kind of wrapping them up and completing them within the ASCs.

Got it. And then just lastly, hiring and retention, what are you seeing generally in the labor markets as far as wage inflation or availability and retention rates?

Yes. So we see it’s down a little bit from last year. And we’re doing, again, great on retention. We’ve seen 2% drop year-over-year is a very big improvement. I’ll credit that to our culture though, I think people come to Parsons and they really like Parsons. It’s – we’re a big company, but we act like a small company in terms of our agility, our flexibility. It’s kind of a supportive culture and I think it’s just a great place to be. So I believe that’s why we’re attracting more than kind of our fair share of talent.

Great. Thank you for the time.

Thank you.

Our next question comes from the line of Louie DiPalma with William Blair.

Carey, Matt and Dave, good morning.

Good morning, Louie.

It seems that your recent $750 million State Department contract win was for Xator and the $1.2 billion GSA award seems related to your BlackHorse acquisition. And I was wondering, does this encourage Parsons to be more active on the M&A front as your current formula seems to be highly effective right now? And on this topic, what is the state of the M&A pipeline for you as you’ve done a fairly significant acquisition every year, I think for the past four years, but it’s just been IPKeys this year. So I was just wondering how you feel about the M&A market. Thanks.

Yes. Thanks, Louie. And I’d say M&A is a critical contributor to our – what we’ve seen in our growth, our ability to buy the right companies, to integrate the companies, to retain the leadership and the people has been very important to our success. To your point, the Department of State work growth has been from Xator. The GSA win was led by BlackHorse, but it included almost all the companies that we’ve bought. I mean, it was Legacy, Polaris Alpha, OGSystems, Braxton, QRC, legacy Parsons. And that win, I would say, was really the culmination of all those acquisitions, the ability to quickly integrate and the ability to go after work that is emerging customer requirements. We still see a very good pipeline on both the federal and the critical infrastructure side. We look at companies every week. We’re going to continue to be very selective so that we’re buying the companies that enable the growth that we’ve been delivering.

Great. Thanks, Carey. And as it relates to the Middle East, how has the labor market been specific to that geography? You reported very strong revenue growth. Is Parsons able to hire enough to keep up with the demand in that region?

Yes. Thanks, Louie. The labor market, there has been very good. We hire from about 40 different countries around the world. So we have quite a bit of pull and the type of projects that we’re doing there are first of a kind one of a kind, so people want to be involved in these, because they’re so unique and compared like to other countries, they’re really in a greenfield stage. So if you’re an engineer, there’s nothing more exciting than being able to go work on a project like Neom or Qiddiya that you may never see in the rest of your career.

Excellent. Thanks Carey, Matt and Dave.

Thanks, Louie.

[Operator Instructions] Our next question comes from Mariana Pérez Mora with Bank of America. Mariana Pérez Mora: Good morning, everyone.

Good morning.

Good morning, Mariana. Mariana Pérez Mora: Question is, you have – you are expecting 12% organic growth this year. That’s what like three, four times the three year CAGR you expected. And with just this year, you almost accomplish the lower end of that guidance. First, how should we think about the future and like organic growth into the next two years? And second, it’s like what are the variables that I don’t know, keep you up at night, and I don’t know, put you in a place to still build some conservatism in the future?

Thanks, Mariana. Great question. We’ve had a lot of success and upside to our financial targets as you point out during the first half of the year. We’ve won a significant amount of work. We do plan to update our three year financial targets as a result. And you’ll hear from us in either Q3 or Q4 for an update. But for now, from a modeling perspective, I would start with the updated guidance midpoint of $4.95 billion and put our Investor Day total revenue targets of mid-single growth on top of that higher base. And then your second part of your question was what part keeps you up? Oh, headwinds. I would say, if any of the macro environment issues – everything within our control I feel comfortable about. So the question is, do we end up with a longer than a year CR, we talked about quadrillion earlier, being a headwind in the second half of the year. Does hiring or retention become more difficult? Right now, we’re not seeing those, but those would be the ones that we would keep an eye on. Mariana Pérez Mora: Perfect, thank you. And then on the M&A side, have you seen any constraints on closing deals at the end, because of hard scrutiny?

We have not seen constraints at all on closing deals. I’ll point out to a couple of things. We look for companies, not that work competing against, but companies that will fill capability gaps to help us become a stronger solutions integrator and move up the value chain. We also try and get companies preemptively. So we try to avoid auction processes. We get companies that we’ve worked with for a long time, so we understand their culture and we know that they’re going to be a fit. One other item I mentioned, unlike other companies, we don’t build in synergies into our M&A case. So anytime we get cost or revenue synergies, those are additive to our M&A case. And then after we buy companies, it’s key focus of us to be able to keep the leadership team, in fact, many of the folks on my executive leadership team today came from acquisitions. Mariana Pérez Mora: Thanks so much.

Thank you.

Thanks, Mariana.

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. And 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.