Parsons Corporation (PSN) Earnings Call Transcript & Summary

Good afternoon. My name is -- good afternoon. My name is Jamie Cook, and I cover the machinery as well as the engineering and professional services companies today. I'm very pleased to have with us Parsons. Today, we have President and Chief Executive Officer, Carey Smith; as well as Dave Spille, who's the Senior Vice President of Investor Relations. In terms of today's format, I will -- Carey is going to give you an overview of Parsons for a couple of minutes, and then the fireside chat will begin. If anyone does have a question, please e-mail it to me, and I will make sure that I get the question asked to Carey as well as to Dave, and e-mail me at [email protected]. And with that, Carey, thank you for being with us this afternoon and participating. And I'll hand it over to you to tell everyone a little bit more about Parsons.

Great. Thank you, Jamie. It's a pleasure to be speaking at Industrials Conference today. Parsons was founded in 1944. So we're a company that been around for 77 years. Over the last 4 years, we've completely changed and transformed and, I'll say, enhanced our company, basically by moving up the value chain. We were a company that, previously, performed projects and services, and today, we're a solutions integrator in both of our segments. We service the defense, the intelligence and the infrastructure market areas. We report out in 2 segments. The first one is Federal Solutions and the second one is Critical Infrastructure. Within Federal Solutions, we're involved in a lot of activities. Those include cyber security, intelligence work, missile defense, space, C5ISR and also other areas like physical and border security, physical security protection as well as biosurveillance and environmental remediation. And then, if I talk about Critical infrastructure for a minute, we're also involved in many areas there, including roads and bridges, rail and transit, aviation activities and what we call smart mobility or connected communities. From a financial performance perspective, our midpoint of guidance is at $3.65 billion for revenue, $305 million for adjusted EBITDA and $205 million for cash flow from operations. We've done a great job in expanding margins, over recent years. From 2018 to 2020, we expanded our margins by 180 basis points. This year, we've also had favorable financial performance with the exception of some write-downs, and those were in some legacy Critical Infrastructure programs that were awarded back in 2016 -- or that were a bit back in 2016 and were awarded in 2019, and we're basically just wrapping those up. From an awards perspective, we're very pleased with the results in both of our segments. We're at a 1.3x trailing 12 months for Parsons. We've experienced our top awards in the second quarter of this year in our Federal segment, which was at 2.7x, and we've had 4 consecutive quarters in our Critical Infrastructure segment of over 1.0x. Our backlog is at a record, at $8.6 billion, which is a 10% year-over-year increase. We have a robust balance sheet, 1.0x leverage, so we have ample power to basically continue what's been our M&A strategy, and we've typically acquired about 1 to 2 companies per year. We've also, recently, authorized a share repurchase program. So what does that mean, going forward? First, we're very well positioned in 2 high-growth, enduring and profitable market segments, and these segments are very much aligned to the Biden administration priorities, including the Interim National Defense Strategy, the FY '22 budget, what was recently released this week, the Global Posture Review as well as the recently approved Infrastructure Bill, which we're very excited about. We have a unique, balanced, differentiated portfolio. We've solidified our rate competes with the recent win of the largest contract in Parsons history, $2.24 billion TEAMS contract over 7 years and a recent classified program over $550 million. We're focused on people first, as a company, and this includes inclusion and diversity, employee engagement, having a differentiated culture and ensuring that we drive for both recruiting and retention And we're very pleased with the recent results we've had with 3 record hiring months. So I guess, Jamie, in summary, opening remarks. It's an exciting time here at Parsons.

Okay. Great. And thank you, Carey. I guess, if we could focus first on your Federal Solutions business. This business hits a lot of key markets, whether it's cyber and intelligence, space, geospatial mission defense. So I'm wondering, if you could, sort of, rank order within Federal Solutions, which areas do you think have, sort of, the highest growth opportunity, sort of, what your award pipeline and win rate, sort of, looks like?

Sure. So I would say, there is that -- we have the highest priority for us, are cyber, space, missile defense and C5ISR within the Federal market. Our overall bid pipeline, right now, is at $43 billion. That's up from $33 billion a year ago. So we're really pleased with that. And within that pipeline, we have over a 100 awards that are greater than $100 million. And I'll jump back for a minute to talk about each of the market trends we're seeing. From a cyber perspective, we expect a lot of growth because there's -- right now, the convergence of cyber electromagnetic spectrum and information warfare to be able to fight against the near peer threats, plus with our portfolio, the fact that we understand the domain knowledge of transportation utilities, how that works, but we can provide the technical cyber security capabilities. We're very well equipped to basically, prevent cyber attacks in that space. In the area of space, we see growth because space is becoming more contested -- congested, and we're involved in space situational awareness. So that's a growth area for us. Small satellite launch and integration is also important as these launches are a lower cost and can be done more rapidly and help to build a disaggregated space architecture. And then I would say in missile defense. We're seeing a lot of transition there as ballistic missile threats become more advanced and with the recent hypersonic threats. So we view all those areas as significant for Federal.

And then, when you think about your win rate historically, what's your, sort of, success rate? And I guess, another question I have, from covering some of the other names like whether it's a Jacobs or whether it's a [ KBR], you have companies that traditionally, weren't playing in cybersecurity or space, et cetera, and they're all trying to move up the food chain into higher value-add service providers within Federal. Has that -- what has that done to the competitive environment? Or do you think, the market is big enough for everybody?

Yes. From a win rate perspective, Jamie, we tend to run around in the competitive space, over 40%. And then our recompetes are nearly 100%. In fact, this year, about 99.9%, which we're really proud of. And to go back to the TEAMS contract, we've been with the Missile Defense Agency for 38 years. So once we get with the customer, we feel pretty confident that our performance will enable us to stay there. As you look at the competitive landscape, I think I would talk about how Parsons is different. We've really built up a company that has end-to-end cyber solutions and end-to-end space solutions. We've positioned ourselves such that we're ready to take on the future threat of the near peer threat. I talked earlier about that convergence of cyber electromagnetic spectrum and information operations. The enemy is fighting an information warfare. That's how we have to be prepared to fight, and that's really what we've been able to do. And then, if I look at our space capabilities, I'd like to view us as a space disruptor. We've come up with solutions like space situational awareness, where we're supporting commercial customers up to classified customers with over 150 different applications. We've developed a system that's an Enterprise Ground System. And it's a disruptor because you used to have a ground system per satellite. Our approach is to have a joint command and control system that can control multiple satellites. And then finally, we came up with an option for the Air Force Satellite Control Network, where you can actually use commercial antennas to drive that. So I think, what Parsons has done, is carved out very niche spaces and very differentiated areas that are important as we look forward to fighting the future threat.

Okay. And then, if we shift a little to the Critical Infrastructure business, what -- how would you compare and contrast the growth trajectory for that versus Federal Solutions? And how is your business helped by the infrastructure builds? And are there any incremental investments you need to make, that are required, either technical capabilities or investment, to sort of capitalize on that build?

So our Federal growth rate has been slightly higher though, we've been strong in both segments. We've run at a 1.4x trailing 12 months in Federal, 1.2x in Critical Infrastructure. I suspect, as we start into 2022, that trajectory will tend to be the same. But to your point, with the Infrastructure Bill, that will change things. As we look at the Infrastructure Bill, there's basically 2 components. There's $1.2 trillion at the top level. Out of that, there's $550 billion of new funding. If you break that down, it's pretty significant, how it aligns to the Parsons portfolio. So $284 billion is -- of that funding is transportation, with good alignment for us. There's $65 billion of broadband, there's $65 billion for energy, there's another $46 billion for resiliency, $54 billion for water, $21 billion for environmental remediation and $11 billion for safety. That's all the new funding. So each of those areas are areas that Parsons is a key player. So we feel really good about that new funding. Then, if you look at the other $650 billion, which is basically the Surface Transportation Act extension, that's going to go up from what was roughly $60 billion per year to $72 billion per year. That's the part of the funding that will start first, and we're already looking forward to capitalizing on. So I would say, expect to see Federal, kind of, lead the way, but Critical Infrastructure will start to catch up, particularly as we start to see this funding flow. And again, book-to-bill have been very strong.

Okay. And then -- On the M&A front, we recently did some acquisitions, the BlackHorse acquisition and the Echo Ridge acquisition. Can you help us better understand what capabilities those acquisitions gave you? And then broadly, how do you think about your M&A framework? And I know, you said you've generally done, I think, 1 to 2 acquisitions per year. But how do you think about, sort of, the return and/or valuation metrics as you're thinking about M&A, going forward?

Yes. So BlackHorse and Echo Ridge are 2 of our recent acquisitions. We've done 6 over the last 3.5 years. With BlackHorse, what we were looking for, was that how do we fight the information warfare battle. So we were all very strong at Parsons in cyber, but they brought additional electromagnetic spectrum in the information operations, specifically around open-source intelligence. And how we add that piece to our slide deck, so that basically, we are prepared to fight that near peer threat. They also strengthened our capability on the joint, all-domain command and control in our ability to connect any sensor to any shooter, and they brought some product portfolio with them. As you look at Echo Ridge, that was really a technology play. We did, basically, a build versus buy assessment to say we like their assured-position navigation timing capabilities, their software-defined radio capabilities and their test and modeling capabilities. Could we develop that in-house or should we just buy it? And that was a better acquisition for us. On the framework, basically, we look at companies that are within $100 million to $500 million annual revenue range. We want companies that have demonstrated an ability to grow at 10% top line, that have greater than 10% EBITDA margin. And companies that are differentiated. We buy on technology, we buy on how are we going to get better capabilities, end-to-end scale because that's what's enabled us to move up the value chain, win these larger jobs. So you can expect to see us continue to do 1 to 2 acquisitions here. We've been very focused in cyber and space, but we would also consider a technology play that would be in the Critical Infrastructure area.

Okay. And what is the bid -- sorry, the M&A pipeline look like? And can you talk to, sort of, what you're seeing on the valuation front, [ ordinary ] valuations are distressed?

Yes. So still a very robust M&A pipeline, and we keep it extremely active. We've taken a different approach to how we acquire companies. We really like to approach companies on an exclusive basis and not get into an auction process. And we do that for several reasons. One, obviously, is, I think, we've done a very good job on the valuations and what we've paid for the companies. More importantly, it's ensuring that we have a cultural fit. So we like to work with companies, a year or 2 prior, make sure that we have that cultural alignment because we know if we do, that we'll be successful, going forward. So I'd say, for us, 4 of our 6 acquisitions were done on that exclusive basis, and we're very pleased with the valuations that we've paid, and we're also pleased with the fact that those companies decided they were a better fit with Parsons than going out to a broad market.

Okay. That's helpful. And then, I think, you've also put out some longer-term targets to the market, 5% to 7% organic growth, 3% to 5%. I think, from M&A, revenue CAGR, 10% adjusted EBITDA, 100% free cash flow conversion. I guess, given -- I mean, you sound pretty bullish, sort of, on the growth prospects that are out there, coupled with the Infrastructure Bill. So do you feel more comfortable with these, relative to where we were, perhaps, a couple of months ago? And then, are there any 2 parts of the portfolio, as you're thinking about your portfolio or segments, that are sort of underperforming that, might not be core, longer term? Just wondering, comforting your long-term targets, and then how to think about the portfolio, longer term?

On the first part, we're in the process of updating our business plan. And as we release our fourth quarter earnings, we will also provide 2022 guidance at that time. We've had some puts and takes. So we've basically -- we've won the new business, so we need to factor the new business. And we have a few things that have pulled out, so we need to do those pull-ups. And we didn't, previously, have an Infrastructure Bill, so we need to add that in, plus now we have the timing, certainty. Whereas back in March, we didn't know if it would happen or what the timing certainty, would be. So we really need to go back, update our business plan and make sure that, that's all valid, and we'll release those targets at that time. And I'm sorry, Jamie, your second part was...

My second question, with regards to the portfolio. So why -- can you talk about your energy -- why are there any parts of the business that are underperforming, that we don't think that will keep fixed? And then the other thing, I feel like a lot of time companies like yourself, have the Federal Solutions business and like the Infrastructure business. And everyone tells me, there's revenue synergies between the 2, which aren't always obvious to me. So to what degree, are those 2 businesses synergistic?

Yes. From a portfolio perspective, we're well positioned in 2 strong segments, and we're in the right part of the segments, again, back on the Federal side, cyberspace, missile defense, C5ISR, will continue to grow. On the Infrastructure side of the house, transportation, water, wastewater, environmental remediation and smart mobility are all growth areas. So we're really happy with our portfolio and how we've shaped it over the years. Also, from a synergies perspective, it's good. We leverage a lot of our capabilities, back and forth. So from Federal, we intend to leverage technology. We've bought companies on the Federal side, but they've brought with them artificial intelligence, cloud computing, cybersecurity. Those technologies also apply on the Infrastructure side. So a great example would be our Intelligent Network Program, which is one of the most globally deployed transportation management systems in the world. We've been able to apply artificial intelligence capabilities to do better predictability on that or for our Vehicle Inspection and Compliance program, we've been able to use cloud-based capabilities to put those capabilities in the cloud. Likewise, if I look from Critical Infrastructure to the Federal side of the house, we're able to apply a lot of our complex program management skills as well as our environmental remediation capabilities to that market. And then finally, looking forward, one of the most important areas, I think, that will get investment, and it's going to be required under the IIJA or the Infrastructure Bill, is that you have to have cybersecurity and resiliency. There's a $46 billion part of money out of $550 billion new money that's going to require then any component that gets funded, has that capability. We're one of the very few companies that has both of those, under the same roof. So we look forward to providing that capability. And obviously, cyber threats continue to increase across our Critical Infrastructure sectors. And we focus on areas, where Parsons has domain knowledge, that are high threat-based and highly regulatory. So those are the hardest to get into and the most differentiated. So for us, we focus on transportation, utilities, health care and facility support. And we think we're unique there.

Okay. And then, I guess, my other question is, when I'm talking to investors on ESG, and I'm sure it's with you, it's a lot more important to you [Technical Difficulty] investors decide where they want -- type of companies they want to invest in. So can you talk about what you guys are doing, from an ESG front, in terms of running the company? And then also, like how do you think your business is positioned on ESG, in terms of helping your customers meet their needs so that there are any businesses that detract from, sort of, the ESG story?

Yes. We're fortunate we have a portfolio that's well aligned. So $2 billion of our $4 billion revenue is directly aligned to an ESG story. So about $1.2 billion in transportation, over $300 billion -- or $300 million in environmental remediation and about another $200 million of water, wastewater, nuclear and other type of treatment activities. And then we're also involved in utilities work. One of our projects is helping the program manager to rebuild a Paradise, which, unfortunately, was affected by the wildfires, and we're involved in renewable energy programs. So we have pretty much a portfolio that aligns well with the ESG initiatives. Internally, we're very focused on ESG. We're focused on areas of reducing carbon emissions. We're focused on diversity, equity inclusion, from a social front. We're also, from a governance front, we've had a public company board in place, even as a private company. We have a lot of board diversity as well as executive leadership team diversity. So those initiatives mean a lot to Parsons, and we're very, very committed to those.

Okay. Great. And then, I guess, another question. What do you think about the biggest misconception is, about Parsons, or what's underappreciated by the investment community? And then, can you speak to -- I think, you guys went public in 2019. Can you think about, sort of, your approach to the market today, relative to when you first IPO-ed?

Yes. So I would say what's most underrepresented. I think you just asked the question, I don't think, our ESG story is well-enough told. And so that's something that we wanted to get the message out better because we truly have a portfolio that aligns with the ESG initiatives, and we're very focused on the ESG initiatives. And secondly, I would say, the synergies between the 2 business, another great question that you asked. We have synergies between the 2 businesses. And I think, that's a real advantage. The fact that we have both of those under the same roof, as we go forward to something like Critical Infrastructure [Technical Difficulty]. Since 2019, since we went public, I would say the biggest change that we've seen, is the multiples. At the time we went public, Federal multiples were much higher than Infrastructure. And obviously, with the bill, you're seeing a shift. So once again, it's good to have a balanced portfolio.

Okay. And then the other question I get a lot from investors, in particular with from an Infrastructure Bill. And I guess, what you're hearing already before the dollars are flowing, is just concerns on labor, and to what degree is labor a constraint to growing your top line, and how you're trying to differentiate, in terms of attracting and retaining talent?

I think, the workforce is going to be the biggest challenge that nearly every company is going to face, as we go forward. We've been very focused on federal workforce because that's obviously, always been a high bar, particularly as you look at the cleared workforce and are very proud of the fact that we've had 3 record hiring months, our best since October 2019, in August, September and October. As we look forward and I look at the Infrastructure Bill, I would say, we're going to be -- and we already have started hiring complex program managers, design engineers, that's going to be the area that we're going to have to have people on board, to be able to implement these programs successfully. Other initiatives that we put in place at Parsons, is we have a true, dual technical career path with [ Program Path ], and it goes up to our Chief Technology Officer level as well as a robust Technical Fellows program. On the Federal side, we started hiring outside the D.C., Maryland, Virginia area. So we've set up a place in Augusta, co-located with the Army Cyber Command in San Antonio, co-located with the Air Force Cyber Command. And we also always step back to look at all of our people initiatives, things like our very robust and active Diversity Equity Inclusion Council, where we have ambassadors at each of our major sites. We recently stood up employee business resource groups that are very focused. We have a large [ MilVet ] program, which has been increasing year-over-year. And we've been recognized for many of these efforts, including minority recognitions that we've received, engineering recognitions that we've received. One that we're most proud of, would be 12 years of award.

Okay. And then, I guess, my last question, just -- all this has had a lot of lessons learned during COVID, whether it's work like but in particular, where you can work, right? And working from home versus working in the office. And I think, a lot of companies have found cost opportunities that they perhaps underappreciate, where they're now thinking about their cost structure could be structurally lower, relative to where we work, pre-COVID. Are there any opportunities there for Parsons that you're contemplating or that you'll communicate?

Yes. So I'd say, first, from a retention perspective, what we've done with COVID is, we've realized, and we did a survey, and our workforce was kind of a 1/3, 1/3 [indiscernible] when we said, "where do you want to work?", 1/3 wanted the office, 1/3 wanted hybrid, 1/3 wanted at home. So what we decided to do is maximum flexibility and say, provided that their manager agrees and it's okay with the customer, they can work where they want to work. And that's been a big retention tool for the company. We do see this as a cost advantage. We were already looking at areas like facilities and how we reduce those. But clearly, there's been cost savings from facilities and travel. And some things, I'd say, are going to change forever. We always thought, it was important that you had a face-to-face, 100% of the time. I think we've learned that it doesn't have to be 100% at the time. You can do some things through. I wouldn't want 100% on Zoom, but I think we could come up with [indiscernible] there. So I do believe that some things are going to change forever and be a cost advantage as well.

Okay. All right. Well, with that, if there's any other last messages you want to get out to the investment community, please do. If not, I appreciate your time. It sounds like a great story, and I know everything is not going to go back to normal, but I do hope we'll be in sunny Palm Beach next year at the conference, instead of zooming. So thank you again, and hope you and your families have a wonderful holiday.

Thank you, Jamie, very much. And I hope you and your family do, too, and we appreciate you having us here today.

Of course. Thanks so much. Have a great day.

Thank you, you, too.

Thank you.