Q1 2022 Parsons Corp Earnings Call
Good day and thank you for standing by welcome to the first quarter 2022, Parsons Corporation earnings Conference call.
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I'd now like to hand, the conference over to your host today, David Kelly Senior Vice President of Investor Relations. Please go ahead.
Thank you good morning, and thank you for joining us today to discuss our first quarter of 2022 financial results. Please note that we've provided presentation slides on the Investor Relations section of our website on the call with me today are Kerry Smith, President and CEO and George fall CFO today, Terrie will discuss our corporate strategy and operational.
Highlights and then George will provide an overview of our first quarter financial results. 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 forward looking.
Statements due to a variety of factors.
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 will turn the call over to Kerry.
Dave.
Morning, everyone and welcome to <unk> first quarter 2022 earnings call.
We delivered strong first quarter financial results and continued the momentum established in the second half of 2021.
We generated healthy organic revenue growth in both business segments reported our highest first quarter adjusted EBITDA and operating cash flow since our IPO in May 2019.
One three contract awards over $100 million and continued strong hiring and retention.
For the full year, we are reiterating our guidance across the board.
During the quarter, we generated a total year over year growth of 9% with contributions from both segments and all four business units are your for your organic revenue growth was 6%, including 8% within our critical infrastructure segment and 4% was in our federal solutions segment.
We also grew adjusted EBITDA, 8% year over year, and improved operating cash flow by $40 million from the prior year period.
I attribute the success to both our strategic evolution to an integrated solutions provider as well as our strong operating discipline.
We lead with differentiated technology have proven our ability to recruit and retain employees and have a strong position into complementary enduring high growth markets that are well aligned with macroeconomic trends in the United States Federal government priorities.
This balanced portfolio across critical infrastructure and National security market is a differentiator for Parsons.
We continue to be excited about the position of our critical infrastructure business given global demand.
In the United States, the infrastructure Bill priorities of transportation, environmental remediation and water and wastewater treatment aligned well with persons capabilities.
We're also seeing increased infrastructure spending in Canada and continued oil price strength is enabling our middle east customers to move forward with new projects.
Demand for federal solutions capabilities, such as cyber space missile defense and C. Five ISR is rising due to the threat environment focused on technologically advanced near peer competitors.
Today, we're facing increased cyber attacks from nation state and other actors.
We have a space race, that's increasingly crowded and test it and which includes anti satellite and hypersonic threats.
Parsons is well positioned to offer solutions to address many of these challenges.
Our two segments are highly complementary and we're uniquely positioned with our collective credentials were bringing in federal capabilities in cyber artificial intelligence data analytics and cloud enabled solutions store critical infrastructure customers. We also leverage our expansive critical infrastructure capabilities.
And design program management, and environmental planning, a remediation dark federal customers.
We will continue to benefit from our balanced portfolio as threats evolve in the world becomes more connected and relying on data that's essential to our national security interests, and our ability to safely and efficiently move both people and goods with resilient and sustainable infrastructure.
Our ability to successfully deliver on our customers' missions continues to enable us to win large strategic contracts.
During the first quarter, we won three contracts valued at more than $100 million.
We're not an option year exercise for $118 billion by the United States General Services administration under the Combatant command cyber mission support contract.
Under this contract, which represents new work, we will be researching developing testing and evaluating tailored cyber solutions for cyberspace operations advanced concepts and technologies and integrating operational platforms.
We also received a $116 million of contract growth on RFA a program for modernizing the United States National Aerospace system.
The bipartisan infrastructure Bill provide a $5 billion to replace air traffic facilities update and upgrade equipment, including land again navigational age and a proof safety security and environmental standards at facilities and.
This FAA contract is a great. Representative example of the complementary nature of our federal solutions and critical infrastructure segments.
As noted on our last earnings call. We were awarded a new task order to provide testing solutions in response to the COVID-19 pandemic for the department of Homeland Security immigration and customs enforcement facilities across the United States.
This award has a potential total ceiling value, including search capacity of more than $100 million.
Realization of this ceiling value will depend upon the future of the pandemic and the long term need for testing.
In the first quarter, we also want to middle East contracts worth a combined value of over $75 million related to Saudi Arabia, as fishing 2030 to redefine urban living and industrial cities within the Kingdom.
After the first quarter close we received $149 billion contract value increase on our program management contract for the Riyadh Metro program, which is the largest metro system development project in the world.
Also after first quarter closed we were awarded a $75 million task order or a contract by a rail customer for series server infrastructure projects Parsons.
It remains a leader in the rail transit sector and we're pleased to see the strong investment sure if our nation's rail system and the infrastructure investment and jobs Act.
Collectively these awards highlight our ability to staff, new contracts and successfully deliver on our customers' missions as well as win contracts and well funded areas of national security and infrastructure importance. Our competitiveness is tied to our team's effort and talent, but also the capabilities that we've added.
Our portfolio through strategic M&A.
During the quarter. We also received notable recognition for our diversity and inclusion initiatives and we were named one of the world's most ethical companies by Ethisphere for the 13th consecutive year.
A summary of the specific ESG awards, we won during the quarter are listed in today's earnings press release.
We have a strong commitment to ESG, which is interwoven within our core values, how we operate as a company in our portfolio, we deliver to our customers. Accordingly, we made a strategic hire of an ESG Vice president to lead this important function across Parsons.
In summary, we delivered a strong first quarter.
We generated healthy organic revenue growth at both segments reported our highest first quarter adjusted EBITDA and operating cash flow since our IPO.
Continued to win large contracts.
Maintained our hiring momentum and continued to be recognized as an employer of choice.
These first of all to build on our momentum from the back half of last year.
As I look forward I am very excited about our business, we're well positioned in two growing enduring and complementary markets. We have made significant strides in recruiting and retention and solidified our base of business by winning all major recent recompete contracts.
We have over two years of revenue and backlog and a strong balance sheet that will enable us to continue to make ongoing organic and M&A investments to drive growth and expand margins.
With that I'll turn the call over to George to discuss our first quarter financial highlights George.
I'm just curious Kerry indicated first quarter results were highlighted by delivering organic growth in both segments.
Margin expansion and cash flow improvement.
Total revenue for the first quarter of 2022 increased 9% from the prior year period.
Was up 6% on an organic basis.
Organic growth was driven by the ramp up of recent contract awards.
SG&A expenses decreased by $2 million, largely due to lower intangible asset amortization and.
And stock based compensation expenses, partially offset by acquisition SG&A expenses.
Adjusted EBITDA of $74 million increased 8% from the first quarter of 2021, and adjusted EBITDA margin was seven 8%.
The increase in adjusted EBITDA was driven primarily by contributions from recent contract awards and acquisitions.
I'll turn now to our operating segments, starting first with federal solutions, where first quarter revenue increased by $40 million or 9% from the first quarter of 2021.
This increase was driven by organic growth of 4% and approximately $20 million from acquisitions.
Organic growth was driven by the ramp up of recent contract awards.
Federal solutions, adjusted EBITDA increased $11 million or 33% from the first quarter of 2021.
Adjusted EBITDA margin increased 160 basis points to eight 7%.
These increases were driven primarily by recent contract awards and contributions from acquisitions.
Moving now to our critical infrastructure segment.
First quarter revenue increased by $35 million or 8% from the first quarter of 2021, all of which was organic.
This increase was driven primarily by the ramp up of recent contract awards and increased hiring activity.
Critical infrastructure, adjusted EBITDA decreased by $5 million or 14% from the first quarter of 2021, and adjusted EBITDA margin decreased to six 9%.
These decreases were driven primarily by a change order on an unconsolidated joint venture project.
It has the effect of delaying profit to future periods.
While this change order had a negative impact on adjusted EBITDA and margins in the first quarter. It will in fact increase future profits and we anticipate that both the first quarter negative impact and the increased profits from the change order will be realized in full by the end of 2023.
Next I'll discuss cash flow and balance sheet metrics.
DSO at the end of Q1 2022 was 76 days compared to 71 days at the end of the first quarter of 2021.
During the first quarter of 2022, we used $26 million in operating cash flow compared to a use of $66 million in the prior year period.
The 40 million dollar improvement was driven by lower payments on our pre IPO executive compensation plans and increased profitability.
Capital expenditures totaled $4 million in the first quarter of 2022.
<unk> to the prior year Peru.
Our balance sheet remains strong as we ended the quarter with a net leverage ratio of 1.0 times.
Turning to bookings for the first quarter.
Ported contract awards of $917 million, representing a book to Bill ratio of 1.0 times.
On a trailing 12 month basis, our book to Bill ratio remains a healthy one two times.
With federal solutions at one point through <unk>.
And critical infrastructure at 1.1.
Our backlog at the end of the first quarter totaled $8 2 billion up 1% from the first quarter of 2021 and total backlog continues to represent more than two years of annual revenue.
Now, let's turn to our guidance we are reiterating all of our 2022 guidance ranges provided on February 23rd based upon our financial results for the first quarter of 2022, and our outlook for the remainder of the year.
For revenue in the second and third quarters, we expect low single digit revenue growth year over year, and then down sequentially in Q4 due to seasonality.
For adjusted EBITDA, we expect year over year growth of 10% to 15% in both Q2 and Q3 and then down sequentially in Q4.
For operating cash flow, we expect sequential improvements as we move through the balance of the year.
Other key assumptions in connection with our 2022 guidance are outlined on slide 10, and today's Powerpoint presentation located on our Investor Relations website.
With that I'll turn the call back over to Gerry. Thank you George were.
We're pleased with our first quarter results. This quarter once again demonstrated our momentum the durability of our growth and increasing operational consistency.
I continue to be impressed with our team's hard work ability to deliver on our customers' critical missions and our position into enduring markets that are well aligned with macroeconomic trends. Our team is executing well in what is a very dynamic environment and where clustered to drive continued top line growth and margin expansion.
With that well now open the line for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to.
To withdraw your question press the pound key.
Our first question comes from Sheila <unk> with Jefferies.
Good morning, guys and thank you for that time and good quarter.
Thank you very much shale.
I wanted to ask about you know just the Q1 day dynamic.
The news went better than we expected.
And that you've previously laid out can you talk about what's driving that strength and how you expect that to progress and are you now can you maybe talk about your cyber exposure how big it is are you seeing any sort of benefits there from whats going on.
Sure Sheila thanks, very much the dynamics as far as the drivers are first continued hiring momentum we're really pleased with that as we indicated the second half of last year, we were up 30% over their first house and that momentum continued into this year. In fact Q1 2022 was our best quarter since Q1.
2019 in terms of hiring we have indicated in the past we had won a lot of work and we just really need to get the job staffed I would say we're also doing a great job on the single award contracts are driving new task orders and work to those vehicles in terms of sniper that's a portion of our defense and intelligence.
Organization and that's an area we continue to look for growth are.
Both as far as supporting Department of Defense and the intelligence community, but also looking in areas such as critical infrastructure protection.
And then just on the hiring can you help frame that a little bit you said it was the best quarters in 2019 Q1 now.
What is you know the hiring Roes and like what is expected.
What do you expect it to grow for the full year and how is inflation I'm a factor in that if at all.
Yes from a hiring perspective.
Made quite a few changes back in July of last year, and I think that was really to our benefit and really strengthened our human resources team and we've seen a big improvement. We've also revisit it kind of all of our HR programs to make sure that we're best in class and employer of choice. So that that has really turned the needle for us and we've been able to assist.
And that momentum, which we see as very positive as far as inflation I indicated on the last call that we were kind of planning for around a 3% to 3.5% increase and that's where we currently sit but it is something that we're going to continue to watch as we go throughout the year and see what it looks like for.
For the full year.
Okay. Thank you so much.
Thanks.
Our next question comes from Gavin Parsons with Goldman Sachs.
Hey, good morning.
Good morning, Kevin.
George I apologize if I missed it did you quantify the size of the critical infrastructure adjustment.
Yeah. It can help you with that Kevin Good question. So the impact in the quarter was about $4 $1 million negative and it's all relative to the timing of the performance of work on this particular contract which is a non consolidated joint venture we actually received an additive change.
Water.
Which will result in Parsons, earning $2 million more profit in the future. However, due to the fact the margin on the change order was lower there essentially was the take down of profit of $4 1 million in the quarter.
We will get part of that back this year, we'll get the rest of that back next year. So in total over the two year period, we'll actually generate $2 million more in gross profit and <unk>.
Just that EBITDA than we originally anticipated.
So to break it down by year of.
The impact on this year, even though it was $4 1 million in the first quarter will actually be for the full year of about $1 5 million negative and.
And we will actually have an impact a positive impact next year of $3 5 million.
So even though it sounds negative inside the current quarter. This is actually a positive development.
Relates to the fact that the nature of the work on the change order is largely subcontractor work as opposed to the earlier part of this project being on a direct performance Super fan basis, So even though it looks negative.
A message I'd leave you with it's actually very positive.
<unk>.
Okay. That's good deal I appreciate all that.
And then maybe if I were to walk margins forward, if I adjust for that you know your margins are up and it looks like 40 basis points year over year.
Just your charges out of last year.
The margin for the rest of the year was nearly 10%.
Got it.
So if I were to walk forward for the rest of this year.
Are there any headwinds to margins year over year or should we expect margins to continue on an adjusted basis to trend higher year over year.
Theres really no notable one.
I would call headwinds in the business per se. There is the one issue I'm sure you talked about this on the last call where we have a notable project completion of wrapped up at the end of the first quarter, the salt waste processing facility project in federal solutions.
That job tended to have rich performance fees. So that's a bit of a headwind, but the fact that we expect to perform obviously much better from an execution standpoint on the critical infrastructure side.
I Wouldnt say theres headwinds other than S. W. P.
Got it okay. Thank you very much.
Our next question comes from Bert Subban with Stifel.
Hey, good morning.
One morning.
Here, you mentioned oil prices, helping your international customers in the Middle East how much of a tailwind do you expect that to be for your business and how quickly do you expect some of those projects to ramp it sounds like you're already doing one rail projects over there thats new I'm. Just curious do you have any thoughts about how that could propel the business from here.
Yes.
Middle East, we are seeing the infrastructure markets start to pick up due to the oil price increases. If you look back two years ago oil was at $20 a barrel last year. It was <unk> 65, a barrel at the beginning of this year was 78 and now it's 105 and these trends are really allowing the GCC to move forward more quickly with major infrastructure projects.
Like what we're seeing in the Kingdom of Saudi Arabia pension 2030 program and the UAE Railway program. We had a couple of wins I cited in the script that totaled 75 million. These are basically new industrial cities. There that are being built in the kingdom of Saudi Arabia. One is the knee oxy gone we were awarded a contract.
<unk> for 90 million, we received an additional add on to that contract for $44 million and we're providing project management consultancy services to build the new city of me on the second one is the King Abdullah Financial District, where our original contract value was 66 million. We've received it now on a 31 million.
And some additional scope and that's basically a new iconic business and lifestyle destination that spanned scenario of about 11 square kilometers. It's also one that's targeted for ESG initiatives to achieve LEED platinum certification. So we're quite excited about the opportunities that we're seeing in the middle East.
Got it thank you and maybe on the other side of the business.
I think you used to break out your missile defense and see by Biopharma segment as being.
Somewhere in the ballpark of 16% of your total revenue so pretty substantial portion of the federal solutions business can you say I mean can you just give us like a frame around how much of that segment used to be or currently is related to missile defense and are you starting to see increased activity there or do you expect that to start to ramp more in 2020.
Great. Thanks for the time.
Sure for the full year 2021, it was about $582 million of our business. We are seeing a continued ramp there we were awarded our teams re compete contract for two point.
Two 4 billion last year, that's a seven year contract that contract does have a 40% surge costs, which we've got not currently planned on but is there for us and I'd say most of our area of focus right now is around hypersonic defense and space based sensor layer.
Thank you Carrie.
Thank you Bert.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Cai von <unk> with Cowen.
Yes. Thanks, so much. So so Kerry you had a 0.9 book to Bill in Federal solutions, which is pretty good given most of your peers.
Combination of the CR and Oh, micron basically hurting them.
Sure.
So the awards in fundings in the quarter can you give us some color.
What impact did that have on you and now that we've turned the corner into the second quarter.
What are you seeing in terms of momentum.
Yes. Thank you.
Thank you.
So first I'd point out we're pleased that our trailing 12 month book to Bill is 1.2 of them, we actually had eight consecutive quarters over one point no and book to Bill as you know is very lumpy within federal we did have a 93 book to Bill. This quarter. We did see a slowdown have proposals are the second half of last year, but the fortunate.
The thing is we saw an uptick the first quarter of this share. So I would say the continuing resolution might've slowed proposals we were in a pretty fortunate position, though because we had won the single award contracts that I mentioned previously so what we focused on this quarter was really getting those contracts ramped up and going and that's what helped our revenue, but I expect.
Our book to Bill will continue to improve throughout the year based on our proposal volume.
Got it and then.
You, obviously looked like you're off to an extremely strong start in the second quarter critical infrastructure can you give us some color there I mean, you've talked about the mid east picking up is there more to come there and when would you expect expect to.
See benefits from the infrastructure bill flowing through to the orders.
Yeah. So the infrastructure Bill I would put it into a couple of parts first part of the infrastructure Bill affects our federal solutions segment actually engineered systems.
We saw an uptick in our FAA contract already and so first of all the infrastructure Bill out of the additional growth that we received $20 million of that was new funding from the infrastructure funds and we expect that contract to continue to grow as I mentioned during the call.
We're also going to see some additional work coming through the Army Corps. So on the federal side of the house those dollars are already starting to flow and.
If you move to the critical infrastructure side of the house I'll break it into three parts, yet so formula funds, which are getting increased you have existing grants and you have new grants the formula funds are already coming out with the new funding as well as the existing grants what will be slower will be the new grant programs. So from a planning purpose, we have always put that into <unk>.
2023, but we may see some start to trickle out in 2022, I did talk about the middle East and the growth there and we expect that to continue as they accelerated programs to move those to the left I'll also mention Canada and Canada, They're investing plan started in 2016 in it.
Provided 188 billion Canadian dollars and funding over a 12 year period and out of that funding 96 billion was new and there is some best about work for public transit clean air and water trade transportation or borrower northern communities.
We're already seeing those funds start to trickle out in phase, one which focused on short term stimulus and smaller projects and then phase two will follow so from a global perspective, I feel that we're very well obsession and critical infrastructure.
Thank you very much.
Okay.
Okay.
Our next question comes from Louie Dipalma with William Blair.
George and Dave good.
Good morning.
Yeah.
For the U S infrastructure Bill do you still expect transportation solutions to have the biggest impact for Parsons and I guess following up.
On the last question what do you think.
The timeline will be in terms of when the infrastructure Bill will create like a significant inflection to critical infrastructure revenue.
Yes transportation process, the largest portion of our infrastructure portfolio, specifically roads and highways. Some rail transit. So we do expect that to have the biggest impact although we will see some growth in areas, such as environmental remediation and water wastewater treatment as well as broadband.
And some utilities as well, but I would say transportation is by far our largest C impact as I mentioned earlier, we're planning on 2020 three we may see a little bit trickle out earlier in terms of some of the rail transit federal projects.
Yes.
Great and for your cyber solutions, there appears to be elevated.
D O D demand for.
Solutions related.
Mitigating satellite jamming with alternative position navigation and timing and last year I believe you acquired.
Also called Unco Ridge, and you also seem to have.
Existing solutions in this area and I was wondering does Parsons see like any or have any significant opportunities in the pipeline.
For like satellite jamming mitigation and alternative position navigation and timing. Thanks.
Yes. Thank you Louie, we provide resiliency today for space asset satellite links and ground system. So I would say the majority of our work is on the ground system components and to your point, we did buy both Braxton technologies as well as Echo Rage help us Sunday assured position navigation and timing space.
We felt that we have some unique offerings and yes, we are seeing opportunities there.
Yeah.
Sounds good thanks.
Thanks, Gary and thanks Stuart Thankfully.
Yeah.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Tobey Sommer with two of Securities.
Thank you good morning.
First question on critical infrastructure.
We compare and contrast, the effect of the infrastructure Bill that occurred I guess.
13 years ago at this point.
Versus the current one I think the dollar values are higher here, but so is the duration of time.
That the customer will spend it and I know you have also got sort of a or.
A different internal focus on what your bid for now versus some of the work that you did.
<unk> plus ago that you might not pursue at this point and how does how do we kind of compare and contrast that yeah.
Yeah. Thanks, Tobey Great question. So the one that you referred to as the Safety Act, which was passed in 2005 that was for $244 billion basically ran over a period of four years.
Here's a little bit beyond that the current one is for one two trillion and all of that 550 billion. This new funding. So much larger funding this time than the prior time. We've previously mentioned that person's grew during the prior Belle by about 10% on the top line.
And that was worth about twice the number of competitors is what we see today from a fact that the industry has consolidated since then.
We have changed our work scope as you mentioned, but I would say back when you look back in 2005, we actually were not doing construction. We were predominantly focused on design engineering as well as owners' engineering work. The exact same as we are today, where we got involved in construction, but starting in a period of about 2010 to $2 15, but it was after we saw.
The funds from the Safety Act so from our perspective, we see the infrastructure Bill.
As being a significant inflection point for the business as it's going to be much larger than the safety Act and we felt we're in a very good position for design engineering and onerous engineering work.
Okay.
Sure.
Would you have any initial thoughts on what the.
Slightly longer term impact of the Russia, Ukraine War is.
The smoothness or lack thereof.
Congress sort of passing budgets and what next year might look like because certainly there's a lot of inflation. So if you don't have a decent sort of mid single digit rate of budget growth you might not have any growth in terms of spending in real terms.
Yeah, we do think that the more as unfortunate as it is and I do give our sympathy to all the people in Ukraine, but we do think it is going to help the budgets go up obviously FY 2022 budget was about 782 billion. That's why twenty-three budget. We were pleased that went up to eight.
Hunter and 13 billion for National Security I would say for Parsons from a longer term perspective, we see the opportunity to assist with what's going on in Ukraine, specifically around areas like Chem bio protection type of activities security systems, specifically electronic security systems.
Yes control physical surveillance, where in Boston also cyber electronic warfare information operations, and then wherever we can assist the NATO countries I am, particularly the Ukraine as they go about rebuilding after the war.
Thank you.
Thank you.
Our next question comes from Ron Epstein with Bank of America.
Just wondering if we could just peel back the onion.
A little bit odd.
What youre seeing.
In terms of.
It looks like the fifth.
23 budget, it's going to come in much better than.
I think a lot of people were anticipating and theres going to be probably even further upside to that.
So as you look as you look down the road.
Do you see there is potential opportunities for persons.
Thank you Ron I would say that yeah. They are quite twenty-three came in much better than everybody expected at a 4% increase.
I think the most important thing for US is the increase in number of research and development, which is really where we play because we play on kind of the formation of programs, where we drive technology innovation and that R&D budget with the Pentagon its largest ever request in that category. So if you look at areas like hypersonic artificial intelligence.
Our security those are all very much aligned with the persons portfolio.
Got it and when do you think you could start to see that kind of flow through.
Business.
I would say once the fiscal year starts it'll be flowing through there.
Definite impetus, particularly given the Russia, Ukraine situation to make sure that we stay in front of us and I would also say even more so than Russia, Ukraine, China still remains the biggest national security threat, and making sure that the United States as well Postured against China, particularly in those critical R&D areas.
Got it thank you.
Yeah.
That's all the time, we have for questions today I'd like to turn the call back to Dave <unk> for closing remarks.
Thank you for joining us this morning, and if you have any questions. Please don't hesitate to give me a call and 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.
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