Parsons Corporation (PSN) Earnings Call Transcript & Summary

All right. Music is off, it's time to roll. So thanks so much, guys, for joining us for the last session of the day, I believe. So joining us for this session is the Parsons folks. For those guys in the room, my name is Adam Seiden. I'm the U.S. machinery and construction analyst. From Parsons, we have Carey as well as Matt joining us on stage. And of course, David is out there as well in the audience. So the format of this session is, like the other ones today is a fireside chat, myself and the guys and gal to my left. And then we'll also be opening it up for the audience response questions as we get through the session here. So with that, team Parsons, thanks so much for being here.

Thanks for having us, Adam.

Great. So I guess I wanted to start off because this is the first time that you and I have been on stage here together here in Miami. So we could talk a little bit and reflect on the past. So you exceeded the high end of your '23 Investor Day targets quite significantly. If you could just talk through of that -- of those targets, like what portion of that outperformance was structural versus cyclical in your views?

Yes. So first, I'd say we were very pleased to exceed the high end of our range for all of our targets. From a revenue growth perspective, we saw very strong tailwinds in terms of budgets. And I would say, particularly, we're in the right markets. If you look at our 6 end markets, they've all had very strong compound annual growth rates, whether it's cyber and electronic warfare, critical infrastructure protection, transportation, urban development, water and environment, or space and missile defense. On our adjusted EBITDA margin, we're pleased that we were able to get 120 basis points margin expansion across that time period with both segments contributing. And I'd say on the cash flow, we had a compound annual growth rate of 26%. So very pleased with how we've done since our March '23 Investor Day.

Yes, as you should be. So if you think about the -- now the forward plan here, right, for '26, '28, you guys spoke to that a bit the other day around earnings. So one of the inbound feedback that we've gotten is just comparing the organic growth rate on the go-forward versus what you've just delivered. So just trying to get a sense of level setting for us, like why is the mid-single-digit view the right anchor point just given the performance that you guys have had over the last couple of years?

Yes. And I'll probably lead off and Carey can add in if I miss something. But I would say really happy with the growth over the last several years, as you mentioned, it's a great performance on kind of across the board. When I look at the next couple of years, we're still seeing really strong growth, and I'll kind of break it up into the pieces. If we look at the Middle East, double-digit growth for the past 3 years. We're looking at 8.5% growth this coming year, still very strong, really accretive margins there in the Middle East. Within North America, it's a little bit more kind of you have -- as we complete some projects, specifically in 2026, we see a little bit slower growth on the mine jobs as we kind of completed some of the capital projects there and then some of the design work kind of just kind of take a 12- to 18-month window on some of that design work. And so we'll win some new design work and that will kind of backfill the second half. But it's a little bit more just the cyclicality of that business, really excited about the trends across critical infrastructure. And so to kind of get back to a double digit there, I think, again, to kind of say on the bull case, I guess, I would say, within infrastructure if we're going to outperform, it would really be around continued ability to hire faster in the Middle East. We've added almost 1,000 heads last year in the Middle East and continue to see strong demand, whether it's on the recently awarded International Airport in Riyadh, that's 3x the size of JFK for those that fly in and out of JFK. Hard to wrap your head around 150 million passengers a year, but the scale of the projects over there is astronomical. And so I know there's some headlines around some programs that are getting delayed or deferred, but without a doubt, in and around Riyadh is a really strong area for us. And so really great growth in the Middle East and North America. When we look at the Fed business overall, I think we're looking at about 6.5%, excluding the confidential contract. So still very strong growth that's kind of taking share, of course, if you think about inflation versus labor inflation versus just overall growth. And so we are continuing to take share. We see great opportunities in our missile defense area, specifically Golden Dome. You see some of the impact there flowing through over the next couple of years. Similarly, if you outperform continued growth within the cyber and electronic warfare area, that's been a key area. You see a lot of what's going on in Russia and Ukraine, and it's amazing how the future wars are changing so quickly. And so just really great demand across the portfolio. And so the outperform would be as you start to see inflow from reconciliation dollars or maybe a $1.5 trillion budget, all those things would help us outperform. But again, really happy with the project the forward-looking growth rates, maybe not quite the double digits we had the last couple of years, but still very strong.

Yes. Totally fair. So we touched a little bit on the top line. Now thinking a little bit on the margin side. You guys came out with a 10%-ish number plus. So what would need to happen for those margins to exceed that 10% level?

Yes. So I'd say really happy with 2025, we had just about 10.4% margin within Critical Infrastructure. We're showing about 10 basis points of expansion in 2026. On the Fed side, we're showing about 20 basis points of margin expansion. We have a slight headwind of $350 million from the confidential contract that wraps up in February of this year. So a $350 million decline year-over-year on an accretive contract. It's a bit of a headwind on the federal side. So Carey and I generally are pretty comfortable with the Fed business being in kind of that high 8s, low 9s, depending on the mix at any point in time. As your cost-plus business grows faster than your fixed price, of course, there's a little bit of pressure on margin. We've done accretive acquisitions. So we have a great acquisition recently called Altamira, just about $200 million -- just over $200 million worth of revenue this year at accretive margins. So that will benefit the federal business by about 20 basis points. And so you kind of have that shift going on, which is the accretive contract going out, new acquisition coming in. And then we just announced this morning a big production award on a products contract called Joint Cyber Hunt Kit as we continue to get more into the product side of the business, where there's accretive margins within products. So whether it's our Joint Cyber Hunt kit or Assured navigation precision timing, better known as PNT or some of the other tools that were -- that we see in the field over in the Ukraine today, it's really great demand for our products. And so we see that as an opportunity on Fed as well. So overall, how do we get back to -- how do we get that extra 30 basis points? It's really continued improvement on performance within CI North America, get the legacy contracts completely behind us. Operationally, they're complete, but getting some of the final change orders and negotiations with customers behind us. And then within Fed, accelerate growth on the product side.

Great. And you did mention, as far as there are some challenges from a fixed price contract. So I think you just defined what it is, but just a reminder for the audience. And then is there any ongoing impact beyond '26 that we should be thinking about there?

So generally, our Federal Solutions sector performs very well. We did have one program, and it was in a remote location. So we experienced some logistical challenge, and we're currently working various options on path forward with our customer.

Got it. So -- your guys' backlog, funded backlog is at really strong levels, record levels, right? So beyond the headline number, though, I think folks like to say like what's actually behind it? What's going on -- when you peel back the onion, what's actually there. So how does the quality and the visibility of the backlog look relative to where you want it to be and to where it was a couple of years ago?

Yes. So I'd say we're very happy at 73% funded backlog. That is the highest that we've ever had. It's very high compared to our peer set as well. One thing when you look at our backlog for our company, we have about $8.7 billion in backlog, but we have another $11 billion in awarded not booked. So if you add the 2 together, it's kind of a better reflection. Within the awarded not booked, about half of that amount is follow-on option year exercises. The other half of that amount is work that's been awarded to Parsons as a single contractor, and we just have to work up to the ceiling value. So I would say, overall, we're pleased with our backlog as well as our awarded not booked.

Got it. So yes, lots of contracts have been awarded. You mentioned PNT. Is that what's going by? Okay. But then -- but in general, also awarded not booked. So when you look at book-to-bill, I guess, just 1x book-to-bill for '26, the feasibility of that, I think you have said in the past, curious there. But then also what gives you confidence as far as forward bookings on the prospects that you see out there?

Yes. So for 2026, we're planning for a 1.0 or better in both federal as well as Critical Infrastructure. Critical Infrastructure has really been a highlight because we've delivered 21 consecutive quarters of greater than 1.0 book-to-bill. And I would also point out that at the Parsons level, we've been greater than 1.0 book-to-bill since our IPO in May of 2019. So even though our revenue has increased over a couple of billion dollars, we've been able to retain that. Within Federal, we did have the longest shutdown history, 43 days in the fourth quarter. But I'd say we're pleased with the momentum that's coming out of that shutdown. As we announced on the earnings call, we've had 6 contracts greater than $100 million that were awarded. Those were all in the Federal segment. And then we also -- 4 of those contracts were new, new work to Parsons. One of them was $392 million classified contract over a 10-year period. That was a takeaway from a Tier 1 company. We had a $200 million classified contract over a 5-year period. We also were awarded a new rocket facility, Nammo is a Norwegian company. So they're expanding in Perry, Florida, and we're going to be designer and program manager for that facility. We were also awarded $125 million 5-year recompete with the Army Research Laboratory, a contract that we've held for a long time. And then after the quarter ended, the FAA exercised our option period, which is for 3 years on our technical support service contract, a full year early. So we were very pleased with that. I think it's a testament to our outstanding performance that we've experienced with the FAA. And then finally, the contract that Matt mentioned earlier, the Joint Cyber Hunt Kit, that's a really neat one because it was procured under another transaction agreement. And when it initially started off, there were 100 competitors. It was down selected to 3, and then we ultimately became the winner. We've delivered over 500 of those cyber threat hunt kits prior, and we expect to do over 700 more in this current contract over 3 years.

That's a lot of contracts there. So on the FAA side, the extension and the option that you got there. So how quickly should revenue ramp on that?

Yes. So that option period is 3 years, and it starts April 2027 and runs until April 2030. So that was exercised early. We've been performing on the technical support service contract for 24 years. We've been supporting the FAA for over 50 years. We've worked at over 1,000 FAA locations coast to coast, whether it's navigation aid sites, communication sites, doing automation type of work, radar sites. So very pleased with the support that we've provided. We are expecting in 2026 that our FAA technical support service contract will increase by about 25%.

Got it. So I think earlier, it was mentioned about Golden Dome. So maybe a status update there on the latest involvement there to be a system integrator. And if this does progress, seemingly, this would be activity that could last long past this current administration and so forth, right?

Yes. So on Golden Dome, we see participation in several areas. So I'd say, first, we are the Missile Defense Agency system engineering and integration contractor. We've done work for the Missile Defense Agency for a decades. So are very fortunate to be in that position. When you look at what's going to happen with Golden Dome, initially, there's going to be flight test integrated or FTI, which is going to be a flight test targeted in the summer of 2028. To get to that flight test, there will be an integration of a lot of existing sensors and weapon systems. So we hope to be able to perform a lot of that integration work. I'd say additionally, we're looking at opportunities on the local area domes, which would be the domes that would protect cities. There, we would leverage our air-based air defense experience, which is work that we're doing for the U.S. Air Force Base in Europe. Our architecture and our design concepts, we feel have a lot of applicability to the local area domes. We're also on one of the space-based interceptor teams. There were 4 small awards that were granted in that area. And then we're involved in non-kinetic effects. How do you take out a missile using cyber and electronic warfare techniques rather than kinetic warhead. I believe Golden Dome is going to go on, but currently within the $25 billion, the objective immediately is to get to that flight test integrated.

Great. So lots of projects, lots of prospects, things like that. When you think of your medium-term growth aspirations and so forth, how much of that is predicated on budget expansion versus your own share expansion within the categories that you play in and maybe other variables thereabouts?

Yes. I'd say the most important thing for growth that we're looking at in the immediate term on the federal side of the house is our alignment to the reconciliation bill. So Department of War got $150 billion. Department of Homeland Security got $190 billion. So we're aligned to the $25 billion we just discussed on Golden Dome. We're also aligned to the $25 billion that is there for Army munitions and ammunition plant modernization. In addition to the Nammo plant I mentioned earlier, we have 2 projects at Houston and 2 at Radford, which are 2 of the more important Army ammunition plants. Additionally, we expect to tap into the $12.5 billion of the FAA aviation modernization funding and some of the $12 billion out in INDOPACOM. We have hundreds of people in the INDOPACOM region. They're working on cyber signals and intelligence as well as doing important infrastructure work. And then I would say on the infrastructure side, we're looking at the Infrastructure Investment and Jobs Act, $1.2 trillion, not peaking until about the 2028 time frame, having about a 6- to 8-year tail after that. We participate mostly in the surface transportation area. That's about $634 billion of that budget. You would additionally see the next 5-year surface transportation bill getting passed. The objective is to have that passed by November of this year. And within there, we're expecting to see about another $600 billion to $700 billion of surface transportation funding. And then within the Middle East, we're talking very big numbers, $1.8 trillion through 2030, where we've been experiencing rapid growth. So when you look at all the funding that's coming in, coupled with our compound annual growth rate of our addressable markets being between 4% to 11% on each of our 6 end markets, we feel well positioned.

That's great. Well, the numbers are big. The airports are clearly very big, too, in the Middle East. So I guess maybe that's a question on the Middle East then. So what's your competitive advantage there that has you guys so successful ultimately? Middle East is close to 20% of revenue, right? And then I guess, how do you guys manage some of the concentration risk or to the point, I think, earlier that like headlines around maybe some shifting priorities of what they're looking to build there, including, I think, just recently, the Asian games got shifted away from the region, too.

Yes. We've been in the Middle East for 6 decades, one of the longest companies there. Within Saudi Arabia, we've had a 50-50 joint venture company called Saudi Arabia Parsons Limited, and that's been in place for 5 decades. The important thing in the Middle East, we've never come and gone as markets have been good or bad. We've stayed there continuously. We're also self-sustain there, so the business can run. We've got finance people, HR people, all the support functions so that they can run on their own. We've successfully delivered the most complex projects in the world over in the Middle East. So whether you're looking at the $250 billion Cadia, the world's largest entertainment center, King Salmon Park, the world's largest park, 5x size of Central Park. We're doing the airport, as Matt mentioned, King Salmon International Airport. We were just awarded New Murabba, which is going to be an industrial city within Riyadh. We're performing on Riyadh traffic management. We just deployed our intelligent network, which is our first deployment of our advanced traffic management system. We're doing Riyadh Rings and Roads. We're involved in King Abdullah Financial District, and I could go on [indiscernible], which we've done for 5 decades. So pretty much hitting all the major projects there. How they're balancing the rephasing, I think that Saudi Arabia is being very fiscally responsible. When they set out Vision 2030, it was basically how do they diversify away from oil, and they set up 13 different sectors. So they're putting priority on the sectors to get to the 2030 Expo and the 2030 for World Cup. And those sectors are things like transportation, tourism and hospitality, the things that they need in place to meet those events. Then there will eventually be a Saudi Vision 2040 plan where they can start to refund some of the other sectors. So beyond transportation and urban development, we've also gotten into the defense sector. We've gotten into the security sector doing border security work, and we've gotten into the tourism and hospitality segment.

Yes. So there's -- so that puts the long term in perspective in which there's a lot of activity there. And like you said, 5 decades of experience, you've got a lot of lineage history. Now on the shorter-term side, I think there was -- at the earnings call, you were talking a little bit about the holiday, just holiday timing impacting this year. So ultimately, I guess the question is where does the Middle East look like it's going to grow in 2026? Or what sort of growth rates?

Yes. So as you mentioned, overall, expect the Middle East to grow about 8.5% this coming year. We have seen Qatar and UAE grow faster over the last couple of years in Saudi specifically. We do have the headwind on Nammo that I mentioned before. But overall, again, really strong growth in the Middle East at 8.5%. We do have a little bit of an anomaly here coming up in Q1 where all of Ramadan and Eid slides into Q1 versus being spread over the 2 quarters. So we are expecting flattish for Q1, followed by 18% growth in Q2 to balance out to 8.5%, which is in concert with the total year. So again, really happy with the growth in the Middle East, continued expansion there.

And thinking of other areas across the portfolio, a lot of times I get questions around nuclear and where is there areas -- who's involved in that space? I think you guys mentioned it on the call there. So how big is it today? But more so, like what are the most compelling opportunities in whether it's microgrids or NNSA work and things like that?

Yes. Most of the work we're doing today, we have worked with the Department of Energy. We've been involved with the National Nuclear Security Administration, supporting the 8 sites as the program manager and engineering -- owners engineer rep for a number of decades. It's been a successful contract for us. We also won a year ago the counter nuclear smuggling detection and deterrence system, and that's a $1 billion contract. We're 1 of 2 contractor awardees on that. That spans over about a 5- to 6-year period. And so that's off and running. We were awarded the Africa region. We were also awarded the Eastern Europe region and most recently, the INDOPACOM region under that contract. We're doing microgrid work. We have a contract with the Army Corps that we're working on currently in Puerto Rico that's been quite successful. And we're looking at some various small modular reactor projects that would be with the Department of Energy. A lot of our role is going to be program management and owners engineering rep.

Great. Maybe we'll switch over to the audience response questions for a minute here. There's little gadgets on your table there to participate. First question will come up in a half a second. All right. So do you currently own the stock? Yes, overweight, market weight, underweight or no? Carry, no clicker. Okay. Room full prospects. Next question, please. What is your general bias towards the stock right now, positive, negative or neutral? Once the timer goes, it's the best time to click. All right. It's about half and half split between positive and neutral. Next question, please. In your opinion, through-cycle EPS growth for Parsons will be above in line or below peers?

I think Dave has 2 remotes back there.

He's got like a treat. All right. About 60% of the room says about in line and about 40% above. Next question, please. In your opinion, what should Parsons do with excess cash, bolt-on M&A, larger M&A, repos, divvies, pay down -- debt paydown or internal investment? Okay. So we got a little bit of M&A and then about 2/3 of the room on the repo side. Maybe let's talk just about M&A for a second. You just recently did the Altamira deal. I think that came up earlier in the conversation here. So how does that strengthen your guys' competitive position in those markets?

Yes. We're really excited about Atomira. That brings 600 employees, 90% of whom hold top clearances into the organization. Their focus is on areas, including signals intelligence, specifically [ Multi-intelligence ]. So how do you merge various types of intelligence like HUMINT, GEOINT, SIGINT altogether into an actionable intelligence solution. Second, they're focused on missile warning and missile tracking. That's another area that is going to be very important for Golden Dome. So it gives us more tools in the tool chest as we look forward to that. And third, they're focused on space ground systems and specifically with the intelligence community. We have a great opportunity to cross-sell with Altamira. They have a better presence and bigger in terms of the intelligence community. A great example is there at the National Air and Space Intelligence Center. We're at the Missile Space Intelligence Center in Huntsville, so we can both cross-sell our capabilities to each other. And recently, they were awarded a very large contract with the National Security Agency, which expands our presence there. Likewise, we have a very good presence with Department of War that we can bring in their capabilities.

Got it. And one of the reasons why I think repo came up on here is because there's been a bit of share activity there, partly on the case of AI. So just curious, we're asking every company at this conference these questions around AI, but also just it's relevant, of course, for your services. So ultimately, how do you guys think AI affects your business and your customers' businesses -- customers' project aspirations?

Yes. So I'd say we've been doing AI for over 2 decades. It's embedded pretty much into everything we do on external use cases and on internal cases across the company. Within our federal business, we're a mission solutions provider. So whether we're providing offensive cybersecurity solutions, doing space situational awareness, counter unmanned air systems, it's ingrained into our offerings. And then if you look on the infrastructure side, I always like to equate it to when I graduated from college, I was drafting. After I got out of college, there was computer-aided design, then we went into building information modeling, and we went from 2D up to 5D. AI is just another logical step in that sequence. So if we can get to a point that we can leverage AI to basically take architecture work and AI basically enable it, digitally enable it, that makes it better for the designer because now you're allowing the designer to move to a more critical level of thinking and being able to use more automation and predictable tool sets. And that's what we really want to do as a company is kind of move up that value chain. So I would say for us, it's not a new fad. It's not a branding technique. We are an AI company. We've been applying artificial intelligence across both segments. We've identified very strict use cases, revenue cases, been able to drive those with our customers, and it's driven operational transformation throughout the company.

Excellent. Maybe to the last question here as well. Guys thought we were done. We got one more. All right. In your opinion on what multiple of '26 earnings should Parsons trade. It ranges from less than 10x to higher than 21x. We'll let that go here. Perfect. All right. Split of the room at around 16 to 18 and 19 to 21. All right. So a question, I know we've talked about this before a little bit, but given the split of the portfolio on CI and on the federal side, how do you see that diversification enhancing or not the valuation of the company and giving -- and how it forms the investment narrative?

Yes, I would say it's definitely an enhancement. And we've, as a company, been able to capitalize on the synergies between those 2. What's important to note, if you look over the last 3 years in both segments, if you exclude the confidential contract cancellation, we've been the industry-leading growth leader, one of the top growth leaders in both segments. So we've really been very successful. And if you look at the intersection between those 2, whether it's aviation modernization, where we work with the FAA on the federal side of the house, but we've done over 450 airport programs on the Critical Infrastructure side of the house. In fact, won 5 new airports within the last 12 months. If you look at an area like PFOS, PFAS, that's $40 billion addressable market for Parsons. We have a subject matter expert team that sells both to the FAA and the Department of War on the federal side of the house, but industrial customers and water customers on the critical infrastructure side of the house. And a final example I'd share, Adam, would be critical infrastructure protection. Department of Homeland Security has identified 16 vertical critical infrastructure protection sectors. So how do we protect areas like transportation, utility, water, facilities, health care, telecommunications from being attacked from cyber attacks. We're the only company that's vertically integrated. So we understand the domain knowledge from our critical infrastructure side of the house, and we have the cyber protection capabilities from our federal side of the house.

Excellent. So that dovetails into this question. It has a lot of similarities and maybe a good wrap-up one here would be, as a company, you guys have emphasized moving up the value chain and so forth. What does the ideal Parsons portfolio look like when you get through the medium-term aspirations and targets that you laid out there?

Yes. So I would say we're happy with our portfolio, very happy with the way it is today. We like the 50-50 split. We like our 6 end markets. We've got long-term tailwinds in all 6 of the end markets. We're looking at compound annual growth rates across each of them that range between 4% to 11%. We've been able to capitalize on the markets by having outstanding win rates over the last 3 years, we've exceeded 60%. So I would say what we need to do is stay in the markets where we can be a top player. These are enduring markets. They're profitable markets. And I think we've shown that we can be technologically differentiated.

Excellent. Well, Carey, Matt, Dave, the Parsons team, thank you so much for being here. Let's give them a round of applause.

Thanks.