Ladies and gentlemen. Thank you for standing by. Welcome to Q4 2023 Parsons Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Dave Spille, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2023 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our fourth quarter financial results, as well as a review of our 2024 guidance and increased Investor Day target. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2022, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now, I'll turn the call over to Carey.

Thank you, Dave. Good morning and welcome to Parsons fiscal year 2023 and fourth quarter earnings call. I want to start by thanking all 18, 500 employees of Parsons Corporation for their contributions to an exceptional 2023. We executed on our growth strategy, delivered our customers critical missions, and achieved record financial results for shareholders. For the full year and the fourth quarter, we delivered the strongest financial results since our IPO, including records for total revenue, organic revenue, adjusted EBITDA, operating cash flow and contract awards. Starting with the full year, we exceeded $5.4 billion in revenue for the first time and delivered record organic revenue growth of 23%, making us an industry leader in both our Federal Solutions and Critical Infrastructure Segments. We had consistent results throughout the year with organic growth in excess of 20% for each of the last three quarters of the year and double digit organic growth in all four quarters. Our strong results for the year were driven primarily by our ability to win and ramp new contracts, strong hiring and retention, and on-contract growth. In 2023, we delivered over $460 million and adjusted EBITDA for the time in our company’s history and continue to expand our margin, achieving 13 basis points of improvement for the year. Total revenue grew 30% while adjusted EBITDA increased by 32%. Our ability to drive adjusted EBITDA growth faster than our revenue growth demonstrates our focus on margin expansion. For the full year, our contract awards increased 40% to a record $6 billion, which equates to a 1.1x book-to-bill ratio. In addition, our fiscal year 2023 cash flow increased by 72% over 2022 to a record $408 million. For the fourth quarter, total revenue increased 35% year-over-year and 34% organically. Adjusted EBITDA grew by 30% over the…

Thank you, Carey. As Carey indicated, our fourth quarter and fiscal year 2023 were highlighted by record results in a number of areas, including total revenue, organic revenue, adjusted EBITDA, operating cash flow, and contract awards. Total revenue of $1.5 billion for the fourth quarter of 2023 increased 35% from the prior year period and was up 34% on an organic basis. Adjusted EBITDA of $128 million increased 30% from the fourth quarter of 2022 and adjusted EBITDA margin decreased 30 basis points to 8.6%. The adjusted EBITDA increase was driven primarily by accretive organic growth on recent contract wins, as well as growth on existing contracts. Our adjusted EBITDA growth for the quarter was negatively impacted by a net $20 million headwind from adjustments on two separate programs. On the first program, we reached a positive proposed judgment on a rail and transit project for which we realized a $38 million favorable impact to fourth quarter adjusted EBITDA. On the second program, within equity and earnings, we took a $58 million adjusted EBITDA charge. The impact was the result of supply chain challenges identified during the procurement of materials. Normalized margins excluding these two adjustments would have been 9.9% and 8.9% for the fourth quarter and full year respectively. Total revenue for the fiscal year 2023 increased 30% from prior year and was up 23% on an organic basis. The strong organic growth throughout the year was driven by the ramp up of recent contract wins and growth on existing contracts. Acquisitions contributed approximately $274 million of revenue for the full year. SG&A expenses for the full year were 16% of total revenue compared to 18.5% in 2022. The intentional focus on efficient spend positions the portfolio well to continue to drive margin expansion. Fiscal year 2023 adjusted of…

Thank you, Matt. I'm very pleased with the continued strong performance of our company. We delivered record fourth quarter and full year results for total revenue, organic revenue growth, adjusted EBITDA, operating cash flow and contract awards. In addition, we're executing on our strategic M&A program, which is driving additional growth into our business. Our team is delivering consistent results, and we're benefiting from tailwinds in each segment. We expect our momentum to continue, given our portfolio is well aligned to important macroenvironment trends in two well-funded segments, and six growing and enduring markets. With that, we will now open the line for questions.

[Operator Instructions] The first question comes from Sheila Kahyaoglu with Jefferies.

Good morning, everyone. Thank you so much. Good morning, Carey. Happy Valentine's Day, just want to say I think we're all pretty in love with these results and what you've done with Parsons, so congratulations. I mean, it's pretty phenomenal. So I guess my first question is related to that. You started off ‘23, starting for organic growth up 4%. You closed up 23%, and you accelerated into the year, which is kind of amazing. So I guess what unlocked that? Can you talk about was it hiring? Was it just award wins, new business? And how do you expect that to progress? Obviously, you've raised your long-term target.

Well, thank you, Sheila, for the question. Happy Valentine's Day to you as well. So I would say hiring and retention have continued to be strong. Our consistent trailing 12-month book-to- bill of greater than 1.0 has helped us win new programs. We had record win rates this year at 66% with 93% of re-compete. We've secured all four of our major re-compete that are $2 billion programs. And I would say business development is hitting it across the board on all cylinders. What I'm probably most proud of is all four business units deliver double-digit organic growth. So it's not one business unit driving Parsons. All four business units are delivering.

Maybe if we could delve into the Critical Infrastructure growth and just the segmentation on a regional basis. It looks like Europe, Middle East, Africa are growing 2x, North America. So can you just talk about the balance of those two in the high single-digit growth implied for 2024? How do you see it? How much is locked in, whether it's in the backlog or the un-booked pipeline?

Yes, so we're really pleased with the Middle East growth being over 30% this year. We had some very strong wins and large programs, particularly in Saudi Arabia that occurred, but also doing well in the UAE. North America is also doing extremely well and had strong organic growth. If you look at that, it was 16%. So both organizations are doing well. I would say North America is going to continue to speed up because we haven't hit the peak yet on the Infrastructure, Investment, and Jobs Act. We expect that to be around the 2027 timeframe. But with that said, the Middle East also, that growth is expected to peak somewhere between 2028 and ‘30. The next thing is we've got strong tailwinds in both of our end geographies for the long foreseeable future.

The next question comes from Tobey Sommer with Truist Securities.

Hey, good morning. This is Jasper Bibb on for Tobey. I guess just following up on the negative $20 million adjustment in the CI segment. Can you update us how much of that riskier legacy work is still in the segment today? And with a near 10% margin excluding those adjustments, how should we think about the go-forward margin profile as that business comes out of the portfolio?

Sure. Thanks for the question. So, this was not one of the two legacy programs that you've heard us refer to previously. Fortunately, we had indicated that one of those programs was going to wrap up the first quarter of this year, which it did. That is going to present a $18 million tailwind for us as we enter this year because we had $18 million write off on that particular program last year. The second legacy program is still on track to complete in the third quarter of this year and that program is 90% and exceeded some recent technical milestones. The program that we had the $20 million impact or the $58 million write-down was due to supply chain impacts from material procurement. It was a job that had been bid back in 2019 prior to COVID. So we got initial quotes at that time. Once we completed the design several years later and we went back and we refreshed those quotes, we had less supplier availability and those suppliers' prices have gone up. The good news is that this is kind of one off, I'm going to say, within our portfolio because we stopped bidding this type of work years ago. So we don't have other large contracts that have a big majority of material pass through. I'm really pleased that even with this impact, the great job that we've done expanding margins. We were up 13 basis points for the year. We grew EBITDA dollars at 32% with revenue up 30%. So EBITDA is growing faster. And as we looked at 2024, we're going to be expanding our margins by 40 basis points.

Yes, Jasper, I just add relative to Critical Infrastructure specifically, the total year was about 7.2% within that business. We're expecting about 8.5% in 2024. Federal will still be in kind of the low 9%, call it 9.2%, and that's how we get to the eight, nine midpoints. Carey and I have talked long term that by 2025, our goal is to have both segments operating over 9%. And a lot of the new work that we're bidding, as we mentioned, is trending toward double digits. So really positive about the long term projections for Critical Infrastructure.

Thanks, and then the organic growth is obviously really impressive this quarter, but ran significantly ahead of your backlog growth and the book-to-bill. So just how should we think about the ability of the backlog, what you're seeing in the bid pipelines from the awards you won after the quarter of a support for the growth in 2024 and 2025?

Yes, so we're pleased that we were able to win the 15 awards greater than $100 million. And as we announced, we've had two greater than $100 million already as we go into the share. The bid pipeline is very robust. It's the highest it's ever been for our business. It's at $58 billion. Out of the $58 billion, we have 110 awards that are greater than $100 million. We also have a waiting notice of award, $4 billion. And within there, we have eight programs greater than $100 million. And then we've talked about the $14 billion of un-booked backlog. So that's basically comprised of contracts that have option years or un-booked ceiling. And we're confident on good portion of that, being able to convert over the next three years.

Got it. Last question for me. Just wanted to ask about M&A appetite and the size of deals you might be looking at. I guess we did notice the $10 million in transaction and other expense in the guide, so just any color on what that might be related to.

Yes, I would say the overall pipeline for M&A remains strong. I think with the, anything that's in the guide is related to prior transactions. So as we mentioned, we closed the IS Engineers deal in Q4. And so again, the M&A pipeline is quite strong. We feel good about it. We closed three transactions in 2023. Our goal is two to three in 2024 as well.

And I'll just add to that. So we're looking at both federal and Critical Infrastructure. The size of the deals will continue to be around what we've done in the past. We generally look at companies that are between about $100 million and $500 million annual revenue. But as you noted, we did buy the IS Engineers for $10 million. And the reason for that is that it was located in a key state that's going to have a lot of potential growth. And what you tend to see is smaller deals on the Critical Infrastructure side versus the federal side of the house. We've been very selective. We're going to continue to keep our high bar of companies growing greater than 10% top line, greater than 10% percent EBITDA margin. And we're also looking for companies that have technology differentiation, but a good pipeline.

The next question comes from Bert Subin with Stifel.

Hey, good morning. I guess I'll echo everyone's thoughts. I mean, just amazing results. Carey, maybe just to follow up to an earlier question. How do you think you keep momentum going in Federal Solutions? I mean, you just grew essentially 4, 000 basis points above the industry in the fourth quarter. And just curious how much of that was driven by specific contracts, be it full venture or additional work with the FAA, and then how good is your visibility, as we think, to ‘24, ‘25? I guess it's pretty good since you're updating those longer-term targets.

Yes, so to take the second part first, our visibility is very good. The good news too, we have very low re-compete, which we mentioned on the call, but it's less than 5% as we go into this year. We also have that $14 billion of un-booked contracts, so the visibility and line of sight to that transitioning is good over the next three years. We anticipate roughly 50% of that to transition. How do we keep the momentum going as we continue to keep the laser focus on our six core end markets. Those markets are all growing between 5% to 12% compound annual growth rate. Our goal has been to be differentiated, be a top player in each of those market areas. And one thing I was happy about when you look at our wins across the year and those 15, we won in almost every single area. If you look at environmental remediation, for example, we won work in the mine jobs. We expanded our presence in Army Ammunition Plant modernization. If you look at cybersecurity, we've been very, very strong with cyber command as well as the GSA job. If you look at Critical Infrastructure protection, the work that we've been doing with the Department of State has been very good. Also, won work in INDOPACOM expanding our footprint there with Kwajalein housing. If you look over on the infrastructure side in transportation, we were awarded what at the time was our biggest design job since IPO with JFK highways. We just surpassed that with the infrastructure job that I announced on the call today, which will now be our new biggest design job that we've had. And then finally, urban development. The team over in the Middle East has just done an amazing job of securing our position on all the giga projects and the fact that we're not even going to see a peak there until later 2028 to 2030 timeframe. I think we've got a lot of momentum in the business.

Maybe just as my follow-up, Carey, you talked about the Middle East there, clearly been an engine for pretty significant growth. We saw it slow down on the growth basis, but still very elevated. As we look forward, can you just talk about, I guess, what the risks are in the region? Are you seeing any spillover just from conflict in Red Sea, in Israel, Hamas? Or I guess, as we think beyond that, is there a geographic dispersion you expect? I mean, it sounds like Saudi has been really strong. Are you seeing strength in the UAE? Are you seeing a rebound in Qatar? Just curious how the Middle East is shaping out.

Yes, so from a risk perspective, the conflicts really don't pertain to the type of work we do because we're really doing infrastructure. I would call it helping Saudi really build out their infrastructure, whether it’s transportation infrastructure, whether it's new industrial cities, whether it's new entertainment and tourism, the building is just going on across the country and will continue for a long time. It's great for all the people that live there because they'll have places to go for entertainment, their education system is getting improved, their healthcare is getting improved, so I would say that's terrific. On the conflict side where we would see potential opportunities in our Federal Solutions business because of the type of areas we play in, whether that's cyber security, missile defense, intelligence type of work, we also do some RF emulator projects that we've seen deployed. Our geographic dispersion, we are the largest in Saudi Arabia, about 60%, 65% of our business is there. That's also been our fastest growing followed by the UAE, which has had strong growth. UAE's focus has been on mixed use developments and continuing to build out whether it's Dubai or Abu Dhabi, which most of our work there is. We did recently the UAE World Expo. In Qatar, we were heavily involved in the World Cup. We did the traffic management system for that. We also did the Lusail City, which we were recognized as an outstanding consultant for our performance there. I would say Qatar will probably out of the three of those be the slowest with Saudi being the fastest followed by UAE.

And Carey, I guess Matt, just as a sort of last follow up on the cash side, sounds like generation looks really good. And talking more like two to three deals a year versus maybe one to two, I guess in the meantime, how are you thinking about capital deployment? Are you just sort of willing to wait until you guys find the next deal?

Yes, I think that's right, Bert. Obviously, we have the share buyback program that's kind of nominal. We did about $11 million worth of share buyback in 2023, but definitely the focus is on M&A and to your point, the team has done an amazing job with the $100 million in op-cash for the year just focused on working capital improvements and so the cash is generating and we're really achieving critical milestones so really excited about the cash position the 1.0 leverage puts us in a great place to keep pushing deals. I'd say the transition from kind of one to two deals to two to three is a mix of going from kind of a heavier federal to a mix of federal NCI where the CI deals as Carey mentioned are a little bit smaller so we have capacity to kind of get to the two to three.

And that M&A really helps our momentum as well, whether it's if I look at the three recent deals SealingTech really expanded our presence in defensive cyber, we were strong and offensive now we can cover full spectrum cyber operations. I talked about IS Engineers expanding our presence in Texas, the two of us together can move up the value chain and bid and win larger jobs and then IP keys is kind of nice at the intersection between federal and Critical Infrastructure providing cyber compliance for energy and water companies, so those -- all those acquisitions as well as the ones that we've done in prior years are helping momentum.

The next question comes from Andrew Wittmann with Baird.

Great. Good morning. Thanks for taking my question. I think I might just have one question today. And it's for Matt. Matt, as I look at the capital structure you've got this $400 million convertible note out there. It's fully hedged with the bond hedge that you've got on it. And it looks like the conditions to convert that to equity have been met with the trading performance of the stock here in the last several months. So I guess my thought or question is, what are you going to do about this $400 million face that's totally hedged out? Like, I guess is it fair to think of that as basically kind of gone or like not on the balance sheet because you've got the hedge that takes out the dilution that would result if you converted it? And what do you expect to do in practical sense with this, if anything at all?

Yes, I'd say, Andy, thanks for the question. I would say we obviously look at the balance sheet constantly. We want to make sure that we're capable of continuing to do the M&A. The convert that we have in place has been a great deal for both us and kind of the convert holders as the stock has performed so well. So all-in-all, we continue to look at it. I would say that it remains on the balance sheet. It won't go current until August of this year, but we're continuing to look at options as we go forward. So no solid plan yet, but always looking at opportunities.

The next question comes from Alex Dwyer with KeyBanc Capital Markets.

Hi, team. Congrats on a great quarter. So I wanted to ask about the organic revenue growth guide of 7% this year. How that splits between the segments this year and if we can parse through the different assumptions from hiring and retention to win rate to the ramp up of contracts. And if there's upside to this 7% revenue guide, where do you think we're most likely to see this upside come from?

Yes, so the 7% is roughly equal with federal being a little bit higher growth. And as far as upside I would say across the portfolio again because if you look at the 15 wins, we've had in 2023 greater than $100 million and the two that we just announced this year so far, it's across the board in all six of those end market areas, so it really affects all four of the business units.

Yes, I would say to kind of get to the high end as Carey mentioned I think in her script a little bit around labor markets. I think the U.S. budget obviously getting a deal done would be great and so kind of those are the things that we're looking through in terms of trying to get from the midpoint to the high end.

Got it, thanks. And then the Critical Infrastructure backlog continues to remain strong but I wanted to ask about Federal Solutions with the 0.7 book-to-bill this quarter. Like how much of that was the impact of the continued CRs and should we continue to expect this segment to remain below 1x until the government gets a full budget?

So I would say first fourth quarter is always late for federal government services, third quarter is usually kind of a peak but I would say the trailing 12 months is what we look at which is very important and that's been a 1.1 and so I think our federal business has been delivering quite fine. On the CR, no, I don't expect that to drive being below 1.0x. And the reason I don't is because we've already won a lot of work that $14 billion, and the majority of that is in federal that we haven't booked yet that we can still convert. We also, by the way, one other variable, we've got 59% funded backlog, which is very high.

The next question comes from Louie DiPalma with William Blair.

Carey, Matt, and Dave, good morning and great fourth quarter. You're setting the bar very high. Are the Xator, SealingTech and IPKeys acquisitions performing significantly better than their revenue run rates prior to being acquired? And when Parsons integrates these assets, are you able to unlock significant cross-selling revenue synergies that make the returns much more attractive than the original multiple may suggest?

Yes, so I would say Xator has certainly been outperforming on a revenue front. SealingTech is really recent, but we do expect they're going to deliver a very strong performance. I'll talk about that in a minute. And IPKeys is on track with our expectations. We do get the value, as you're pointing out, Louie, from the cross-selling. We haven't factored in revenue or cost synergies as we've made these acquisitions. So anything that we get is kind of above and beyond. Great example would be IPKeys. They have a book of customers, hundreds of customers in the utility and the water space. So in addition to selling those customers, their capabilities, we can also sell the broader Parsons capabilities in those market areas. Likewise, we can take their products to our current utility and water waste, water customers. And so that, we've seen synergies already even between SealingTech and IPKeys and coming up with a new product line offering called Cyberzcape, and we're going to be putting IPKeys capabilities on the fly Away Kits at SealingTech. So that's how quickly we do the integration and we drive synergies, but that's definitely a big factor helping our momentum.

Great. And another one, Parsons has been particularly strong with capturing classified cyber contracts over the past year. What is, in general, what is driving that strength? And are these cyber contracts or some of them affiliated with the geopolitical conflicts in Europe, the Middle East, and Asia? And in general, what is Parsons presence with the INDOPACOM? Thanks.

Okay, so take the first one. What's driving the cyber? I would say, first, we're one of the leaders in offensive cyber, and that comprised about 75% of our business. We have in-depth relationships across the Department of Defense military services, as well as the intelligence community and customers like cyber commands. So we've been able to get a very strong position. We've done work for them for a long time. They know they can count on us, particularly in a time of need, as you mentioned, such as the conflict affiliation. I can't comment too much more on that in-depth, just due to the classification nature. In the INDOPACOM, we have several efforts underway. We've been on Guam for over three decades, supporting public works, that's through our Critical Infrastructure group. We also are on Guam supporting defensive Guam for the Missile Defense Agency through our team's contract. We're on Kwajalein Island. We built the Kwajalein airfield. We're also just recently won the Kwajalein housing, and we're looking for continued expansion there. Particularly, that budget got increased from $9.1 billion to over $14 billion in the NDAA, so that's going to be a big focus area. And then on our defense and intelligence side, we have over 100 folks located out in Hawaii that are working on cyber and intelligence type of work.

Great. And one for, Matt. Are your acquisitions -- are they typically margin accretive and you just forecast that you would expect two to three acquisitions per year. And so in general, should these acquisitions be one of the drivers for your continued margin expansion that you've guided to as part of that 2025 outlook?

Yes, absolutely. We target adjusted EBITDA of 10% or better and so all these companies are performing well. I like to say that we like to buy companies that are doing well and bring them in and have them do better as part of Parsons versus kind of betting on the come, whether it's on revenue growth or margin. So yes, absolutely each one of these acquisitions are expected to be accretive in a very short term and have strong cash flow as well.

The next question comes from Mariana Perez Mora with Bank of America.

Hi, this is Samantha Stiroh on from Mariana. Hi. I just wanted to ask about labor and hiring and kind of what you're seeing on these, what you just mentioned, the classified contracts, kind of getting those certifications. Are you seeing still a strong or like a long wait list there?

Yes, so overall in labor and hiring we're doing very well. Obviously, that's been critical to driving our organic growth. We've seen our retention improve, in fact, it improved by over a 1% year-to- year, which is very strong and we were already ahead of PwC industry benchmarks in that area. As far as classified contracts, the clearance processing moved to DCSA back in 2019 and when it did, they were able to drop the backlog and I want to say it was close to 75%. And they also sped up the clearance processing time for secret and top secret, which has really helped us. Classified areas always going to be the most difficult though to hire, but we've seen some improvement in recent years.

Great. And then on these programs that you have the $14 billion of un-booked, would those require more hiring to keep up with? And are you kind of hiring ahead of that or do you have the people in place already?

Yes, so it's a mix. And I'll put them into two categories. When you look at it about half that $14 billion of un-booked is option years. So those would be current programs that we're performing and we'll get follow-on options. In general, most of those would have the people performing the contract today. There might be some increased or surge scope as you go into the options, but generally those would be on board. The ones where we would get additional labor is the ones that are un-booked ceiling. So a case of example of that would be we won Air Base Air Defense Program in Europe. And so that has just shy of $1 billion ceiling. So we book that as we get task orders and those task orders represent all new work. So it's about 50:50. That is all the time we have for questions today. I would now like to turn the call back today for closing remarks.

Thank you. And thank you for joining us this morning. If you have any questions, please don't hesitate to give me a call. We look forward to speaking with many of you over the next couple of weeks. And with that, we'll end today's call. Thank you. Have a great day.

That concludes today's conference call. Thank you for your participation. You may now disconnect.