Good morning, and welcome to the Q4 2022 Parsons Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. And now, I’d like to turn the conference over to your host today David Spille. Sir, please go ahead.

Thank you very much. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2022 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 fourth 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 8-K, filled on February 15, 2023 and the risk factors to be referenced in the 10-K for fiscal year ended December 31, 2022, which we will file within the next couple days. 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 fourth quarter and fiscal year 2022 earnings call. We had a strong finish to 2022, achieving record revenue and adjusted EBITDA for both the fourth quarter and for the full year, while generating solid cash flow. We also delivered on our 2022 objectives, which result in strong consistent organic revenue growth throughout the year. We have a leading national security portfolio positioned to deliver solutions that outpace near peer threats and we are a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of heightened spend (ph). For the fourth quarter, total revenue increased 16% year-over-year and 9% organically. This was driven by 18% growth in Critical Infrastructure, all of which was organic. Adjusted EBITDA grew by 8% and cash flow from operations was $89 million for the quarter. For the full year, we exceeded $4 billion of revenue and $350 million in adjusted EBITDA for the first-time in our company's history. We also delivered operating cash flow growth of 16%. We achieved organic revenue growth of 9% for the full year, driven by strong hiring and retention, on contract growth and our ability to win and ramp new contracts. As a result, we were one of the organic growth leaders in both of our business segments in 2022. In addition, we maintained a robust balance sheet while completing our largest acquisition since our IPO. We ended the year with a 1.4 times net leverage ratio and Xator continues to win significant contracts and is making meaningful contributions to our results. For both the fourth quarter and for the full year, we have achieved a book-to-bill ratio of 1.0 times on an enterprise basis. In our Critical Infrastructure segment, we achieved a book-to-bill ratio of 1.3 times,…

Thank you, Carey. As Carey indicated, fourth quarter and fiscal year 2022 results were highlighted by record revenue and adjusted EBITDA, as well as solid cash flow. Total revenue of $1.1 billion for the fourth quarter of 2022, increased 16% from the prior year period and was up 9% on an organic basis. Organic growth was driven primarily by the strength of our Critical Infrastructure operations. Our Xator acquisition contributed approximately $67 million of revenue for the fourth quarter. Adjusted EBITDA of $98 million, increased 8% from the fourth quarter of 2021 and adjusted EBITDA margin decreased 70 basis points to 8.9%.The adjusted EBITDA increase was driven primarily by Xator and the ramp-up of new contract awards. The year-over-year margin decrease to 8.9%, was driven by unfavorable indirect rate impacts, higher incentive compensation cost given the company's performance in 2022 and volume on the lower-margin Federal Solutions program. Total revenue for the fiscal year 2022 increased 15% from the prior year and was up 9% on an organic basis. The strong organic growth throughout the year was driven by hiring and execution in both segments. Acquisitions contributed approximately $205 million of revenue for the full year. SG&A expenses for the full year were 18.5% of total revenue compared to 20.7% in 2021, due to the efficient growth across the portfolio. Fiscal year adjusted EBITDA of $353 million increased 14% from 2021, and adjusted EBITDA margin decreased 5 basis points to 8.4%. The adjusted EBITDA increase was driven primarily by improved program performance and accretive acquisitions. The margin rate decrease was driven by lower equity and earnings from joint ventures. I'll turn now to our operating segments, starting first with Federal Solutions, where fourth quarter revenue increased by $69 million, or 14% from the fourth quarter of 2021. This increase was…

Thank you, Matt. In closing, I'm very pleased with our 2022 results. We delivered on our 2022 commitments, resulting in record revenue and adjusted EBITDA, along with strong cash flow growth. Looking forward to 2023 and beyond, we will benefit from tailwinds in both our Federal Solutions and Critical Infrastructure segments, with all six of our end markets simultaneously growing: cyber, space and missile defense; critical infrastructure protection; transportation; environmental remediation; and urban development. We have a leading national security portfolio positioned to deliver solutions that outpace near peer threats, and we're a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of hype and spend. And as a collective company, we are uniquely positioned to capitalize on areas that cross over between Federal Solutions and Critical Infrastructure. Before we begin the Q&A session, I'm pleased to announce that we will be conducting our Investor Day on March 15 at the New York Stock Exchange. This will be a great opportunity to learn more about our strategic vision here from business unit leaders and participate in Q&A sessions. We hope you would join us for this event. With that, we will now open the line for questions.

Yes. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Bert Subin with Stifel.

Hey. Good morning.

Good morning.

Good morning, Bert.

Could you maybe help walk us through the guide in a little more detail? If I look at 4Q, Critical Infrastructure had a super strong quarter, margins turning the corner a bit, organic growth well ahead, I think, of expectations. Is there a view that, that momentum slows in '23 or is this more Federal Solutions driven? I know you said you expect organic growth in both. But if I look at sort of the EBITDA in '22 relative to '23 and sort of layer in the annualization of Xator and some of the growth on Critical Infrastructure, it would seem like maybe there's more upside. Is this sort of a conservative view or do you have an expectation that Federal Solutions sort of steps back a little bit?

Yeah. So we're going to continue our trend of putting together measured guidance for 2023. So we have total growth at 7%, organic growth of 4%, which is 5% for Critical Infrastructure, 3% for Federal. We have some headwinds, I'm going to say, on the Federal side of the house in terms of revenue. We have two specifically, salt waste processing facility is $20 million and then Quadrant (ph) declining because we've reached the peak of performance is $67 million. So we'll be offsetting that from a revenue perspective. On the Critical Infrastructure side, obviously, we remain very strong. We're pleased about say also with our continued track record of competitive wins, we have a strong win percentage of 49%. We still have about $8 billion of awards that we have not put into backlog. So those are single awards that we've won. But just because of the bookings approach we take and a great example is Giant Mine, where we expect the program to be worth $2 billion, but it's $270 million. From a margin perspective, as we go from this year into next year on Critical Infrastructure, we expect to have higher equity and earnings of $8 million, which will help boost our margins there. If you look at Critical Infrastructure, which is where we think the most margin potential is, we're going to be focused on operating leverage and having our revenue continue to outpaced our cost growth as we did this year, having continued strong program execution, the higher equity and earnings, and then we're fortunate where demand is much greater than supply in a growing infrastructure market.

Hey, Bert. And one thing, Bert, I'd add, specifically for Xator, we're expecting about $110 million of organic growth for 2023. So they had a strong wrap up to the year, which -- so the 100 -- about $110 million of inorganic for next year.

Okay. No, that's super helpful. If I think through maybe focusing on the Federal Solutions side, I know Carey, you said before, much more heavy exposure to RDT&E. It looks like those budgets are going to be really strong in 2023. Can you just sort of walk us through how you maybe think about your business correlating with those budgets? What the opportunity set looks like, whether it be on missile defense contracts, whether it be in your cyber contracts? And then just in addition to that, is there an update on where TSSC stands? I know that was your largest recompete.

Yes. So we are excited about the overall defense budget as well as the RDT&E budget, which is definitely going to be focused on near peer threats. There is that we expect to continue growth our cybersecurity, both on the offensive, defensive side. We play very heavily on the conversions of cyber, electronic warfare and information warfare to be able to fight a war against a nation states such as China. Space and missile defense will both continue to be high growth areas for us as well as Critical Infrastructure protection. Again, we're fortunate that all of our end markets are simultaneously growing and boosted by a strong defense budget as well as a strong RDT&E budget. On the recompete for the FAA contract, we anticipate an announcement likely second quarter of this year. And again, we feel that based on our several decades of strong performance for that customer that we're highly optimistic that we will be awarded that contract.

Great. Thanks, Carey. Thanks, Matt.

Thank you, Bert.

Thanks, Bert.

Thank you. And the next question comes from Tobey Sommer with Truist.

Thank you. Within the Infrastructure segments, could you talk about the contribution to growth from Saudi and the Infrastructure Bill in the U.S. and how it's tracked versus your expectations so far? And when you think the peak for those contributions to the company's growth and profit maybe sort of out in the future?

Sure. So let me start off with -- I'll start with the U.S., the Infrastructure Bill. We have already started to see some Infrastructure Bill funding. Generally, that's come through federal aviation and federal rail and transit. There's two types of infrastructure funding. There are the formula funds, which are the ones that are quickest out and then there's grant programs and particularly new grants, which take a little bit longer. From a planning perspective, we've assumed that we're going to see a ramp up as we approach the end of '23 and going into '24, with a likely peak around the '26 time frame. The nice thing on the infrastructure funds is that the money is going to last a long time and our estimate is somewhere around six to eight years in terms of long-term funding. In the Middle East, both based on the Saudi Vision 2030 as well as the strong oil prices that we've experienced over the year, they were able to move many of their programs to the left. So we were awarded, as I mentioned on the call, two of the giga projects for the Middle East as well as the Riyadh Metro, which is the largest metro system in the world. And we're doing some other efforts around entertainment venues and mixed-use housing. In addition to Saudi, the UAE also has a large emphasis right now on transportation and urban development. So we've seen quite a bit of growth there. That comprises today our whole Middle East business roughly over $600 million, $650 million of annual revenue, and that will continue to grow as we move into next year. We're not yet at a peak. I would say somewhere in the next couple of years, we would expect to see that peak, but we're definitely still on the incline.

Thanks. And if I could ask one Federal question. As you look for, in your guidance for relatively modest organic growth there, how would you sort of rank order the expected areas of contribution to that growth? You did mention cyber, offensive and defensive in some of the areas where you sit there. But how does that compare to face in other areas of focus within that segment?

Yes. So thanks, Tobey. And again, we do take measured guidance. So from a contribution perspective, Engineered Systems will be organically declining, but overall growing because of the Xator contribution because that's where the two programs I mentioned earlier, the salt waste processing facility and Quadrant resi (ph). But within Engineered Systems, we're seeing substantial contribution in Critical Infrastructure protection. Xator, in particular, has had very strong win rates, focused on electronic security systems, counter unmanned air systems and overall base protection. Within the defense and intelligence area, we have seen growth this year on our missile defense program, where we've been supporting the Missile Defense Agency for over 40 years. We're starting to see a little bit of surge effort in areas like defensive glam and continued focus on hypersonics. I would say cyber and that kind of convergence of cyber electronic warfare information work there, which falls under our Defense and Intel, will be the fastest area of growth though. And then we do expect to see continued growth in space, particularly around space launch, space domain awareness and space resiliency. Thank you, Tobey.

Thank you.

Thank you. And the next question comes from Josh Sullivan with The Benchmark Company.

Good morning.

Good morning, Josh.

There've been a number of high-profile related to the FAA as well as some rail issues getting more attention here. Could there be any accelerated opportunities for you coming out of the Infrastructure Bill because of this?

So we are looking at those areas. Right now, the effort that we're focused on is technical service support where we supply support to all their FAA sites throughout the United States. One area of big focus to your point is going to be how do we modernize the FAA system, and that's an area that we are looking at pursuing. So we do anticipate some future growth there. On the rail side, we implemented at the end of last year to meet the federal mandate, the Positive Train Control Program 1.0. There's an additional 2.0 focus, which is -- how do we capture some of the data that's coming off the systems that we've now installed and be able to do better predictability to improve safety and efficiency. So we're focused on that with our customers. And I would add a third area is going to be cybersecurity. Both of those areas are very focused on how do they make sure that they're protected against cyber threats.

Got it. And then when you look at those 11 -- $100 million awards you received, how much more runway is there on those large opportunities going forward?

It really varies. So if I take Faroe Mine, for example, that we announced at the end of last year, that's a 20-year program. Giant Mine is a 12-year program. Some of the others are five-year programs. So it really varies by contract.

And then just one last one. What are you seeing as far as labor availability and cost? Do you see any moderation anywhere?

So we had just a little bit of wage inflation increase this year. What we're seeing is we expect that to go down somewhat as we go into 2023. I'm really pleased with our -- both our hiring and our retention efforts, though. If you look at Q4 over Q4 from 2022 to 2021, we grew hiring by 33%. And if you look at the full year for 2022 over 2021, we grew by 42%. So I think our team is doing a fantastic job of recruiting people. And I'd say on the other side of it, we're running well below the PwC industry benchmarks for retention. So that means we're doing a terrific job, obviously, of being able to drive our organic revenue growth.

Thank you.

Thank you, Josh.

Thank you. And the next question comes from Mariana Perez Mora with Bank of America.

Good morning, everyone.

Good morning, Mariana.

I'll do a follow-up question on Federal (ph) Solutions. I'd like to understand how you're thinking about the potential continued resolution into fiscal year '24 because I do agree fiscal year '23 is strong. The threats are not easing. But there is a political environment that could end up in a continual resolution next year. So how are you thinking about risk to that in your existing programs and also the opportunities there?

Thanks, Mariana. A great question. On the continuing resolution, first, we have the ability to run a full year without seeing an impact due to the CR. I also mentioned earlier, we have $8 billion of contract ceiling value that we haven't booked that we've been driving task orders over to, and that was a large contributor to us being able to achieve our organic growth. So we can run a long way kind of under our existing ceiling that we have in place. I'll also say it's kind of hard to speculate on the overall budget picture, but I will say Parsons in our overall industry, we've learned to be able to manage through this budget turbulence. We've obviously had it for decades now. And given that we have so much demand in both our national security and our Critical Infrastructure market areas, we can run quite a while without having any impact.

Perfect. Thank you. And then if I may, another question on M&A. Could you mind discussing how is the environment on M&A, where do you see opportunities right now?

Yes. Thanks. On the M&A area, we're looking at both Federal Solutions and Critical Infrastructure. We're going to keep our very high criteria be selective in the companies that we buy, look at companies that are growing greater than 10% on the top line, have greater than 10% EBITDA margin. And most importantly, our technologically differentiated to be able to accomplish our customers' emerging missions. We have a robust pipeline and expect to continue our pace of doing at least one to two deals a year.

How is the pricing of those right now? Are transaction prices adjusting to the new interest rate environment?

Yeah, Mariana. We haven't -- to be honest, we haven't really seen as much of a reduction in expectations on the sell-side. So we [Technical Difficulty]

[Technical Difficulty] which is what we expected to come in. In the fourth quarter, we had some unfavorable rate impacts, a year ago, we had kind of a pickup on rates. And so if you look at the year-over-year, that's basically what's the main contributor there. Again from a margin perspective, I'd say federal delivered as expected at the 9% range for the year.

Yeah. Sheila I'd add and Carey kind of hit on this but I'd say throughout the year, you saw we had really strong base and managed our cost well. So kind of the downstream effect of that is in Q4 when we update billing rates and we kind of come down and it has a negative impact. So I would say the programs that are running off really don't have substantial margin impact. SWPF was favorable. Quad is probably a little bit of a lower margin. So that coming down could be a little bit accretive for us. And so the positive side of the rate impact as well as unfavorable for Q4. Longer term, lower rates helps us from a competitive perspective and gives us some more capacity within our single award IDIQ. So not a great story for the quarter compared to last year, but all-in-all, really positive to Carey's point, 9% for the total year is in line with our expectations.

And just when we look forward for '23, the flat guidance, are there any puts and takes in that M&A as a potential contributor? Like why is, I guess, the outlook flat and how do we think about that?

Well, from a margin perspective, we're going up 20 basis points in 2023 over 2022. We have not assumed new M&A in there. So to your point, Sheila, that would definitely be additive as it has been as we've done past M&A, and M&A has largely been reflected in Federal.

Sheila, were you talking on the top line? [Multiple Speakers]

No. All good. No, that's super helpful. And then just on CI, it was someone asked already, but the mid-single digit organic growth guide. How do we think about the Middle East contribution versus other regions?

So the Middle East contribution will continue to be very strong. But I'd say we're seeing strength across the board. North America has picked up both the U.S. with the IIJA funds roll out there as well as Canada, where they passed their bill back in 2016, and we're involved in 27 of the leading 100 infrastructure programs, so roughly a third within Canada. I would say it's just making sure that, again, we have measured guidance that we continue our hiring that we've been able to do and continue our retention and continue our program execution.

Great. Thank you.

Thank you. [Operator Instructions] And our next question comes from Cai von Rumohr with Cowen.

This is [indiscernible] on for Cai. Thanks for taking the question. It looks like your full year book-to-bill at Federal Solutions was below one in 2022. Given this, what should we expect for bookings in Federal Solutions in 2023? Thank you.

Yeah. Thank you, Spencer. So we've planned for a book-to-bill of 1.1 for Federal in 2023. As you know, awards are very lumpy. I think what's really important is the ability to drive organic revenue, which we've been able to do at 9% for the company, 12% in Critical Infrastructure, 6% within Federal. Continuing our strong win rates of 49%, which is very good. And then again, we have quite a bit of bookings that you don't see reflected because our approach is to book the make sure that we get up to that level of funding, then we book the follow-on option years. So a great example there is our team's contract for missile defense agency even though the award was $2.24 billion, we've only booked $618 million. I would also -- one last point too, Spencer. We were awarded two contracts right at the end of the second -- right at the beginning of Q1, just missed Q4. One of them, we've already announced for $94 million for an Intelligence Community delivering cyber solutions. The second one is a large contract also that's been negotiated and it falls within the Federal as well.

Thank you.

Thank you.

Thank you. And the next question comes from Louie DiPalma of William Blair.

Hey, Matt and Dave. Good morning.

Hi, Louie.

Hi. Louie.

You announced the large Faro Mine extension. Carey, are there other large environmental remediation projects similar to the Faro and Giant Mine programs in your pipeline?

Yeah. So we announced Faro last year, and we announced Giant Mine this quarter, both of those are very significant jobs in the billions of dollars. And again, Faro, we're running about 20 years and Giant will run about 12 years for us. There are other large reclamation jobs. What we're starting to see is the United States is really putting an increased focus on it. We formed some partnerships with groups such as [indiscernible] nations to be able to do a pipeline there. Now having said that, the two mines in Canada are some of the largest mines in the world. So the magnitude won't be quite the same, but there are opportunities within the U.S. as well.

Great. And these contracts are very long term in nature. In general, for environmental remediation projects that have like a 10-year duration, how does the revenue recognition and like margin structure work over the course of the contracts?

So first off, Matt, we'll have something to add, I'm sure here in a minute. But first, I will say on these contracts, they are continuation efforts, but we're going to see expanded scope. So for example, on Giant Mine, we expect our scope is increasing by about 66% as we move into term 2 because the amount of work that has to be done versus term 1. Matt, do you want to talk about RevRec?

Yeah. Just on the RevRec side, it's standard cost to cost. So it would be as we -- as the cost comes in, we'll be recognized revenue, there's no pre-recognition or anything on any substantive part of it. On the margin side, I would say it's probably pretty flat throughout the period. The opportunity would be as they ramp up and grow, then we'll get a little bit of an absorption opportunity. So there could be some growth in margin, but I don't think it will be substantive enough to drive the overall company necessarily.

Great. And switching gears, with the rising geopolitical tensions and accelerating from development of counter hypersonic missile activity, what are your general expectations for your Missile Defense Agency work in 2023 and beyond? It seems as though there was strong funding in the defense budget. But what are your expectations even if there's a threat of a continuing resolution or a shutdown in 2024? Thanks.

Yes. So our contract, again, has already been awarded for the $2.24 billion. Within that, we have a 40% surge clause that they can exercise at any time. There's three areas of focus for the Missile Defense Agency. One is defense of the Homeland. Second one is defense of Guam and the third one is the counter hypersonics activity. So those are the three priorities that our team is supporting Missile Defense Agency on today.

Excellent. Thanks, Carey. Thanks, Matt.

Thanks, Louie.

Thanks, Louie

Thank you. And that's all the time we have for questions this morning. So at this time, I would like to return the floor to David Spille for any closing comments.

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.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.