Yahoo Finance Parsons Corporation (NYSE:PSN) Q1 2024 Earnings Call Transcript
Parsons Corporation (NYSE:PSN) Q1 2024 Earnings Call Transcript May 1, 2024
Parsons Corporation beats earnings expectations. Reported EPS is $0.7, expectations were $0.62. Parsons Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to First Quarter 2024 Parsons Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Dave Spille, Senior Vice President, Investor Relations. Please go ahead.
Dave Spille: Thank you. Good morning and thank you for joining us today to discuss our first quarter 2024 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 first quarter financial results, as well as a review of our increased 2024 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 Form 10-K for fiscal year ended December 31, 2023, 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 but 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.
Carey Smith: Thank you, Dave. Good morning and welcome to Parsons first quarter 2024 earnings call. We had a great start to 2024 after reporting record financial results on fiscal years 2022 and 2023. For the first quarter of 2024, our momentum continued with record quarterly results for revenue, adjusted EBITDA, adjusted EBITDA margin, contract awards, and total backlog. Our ability to leverage our strong balance sheet to invest in software and integrated solutions, as well as to acquire companies with differentiated technologies is enabling Parsons to move up the value chain and win larger and more profitable contracts. Our team continues to perform at a high level, and our persistent focus on our six growing end markets is enabling us to capitalize on the tailwinds that are positively impacting both, our Federal Solutions and critical infrastructure segments.
During the first quarter, we generated over $1.5 billion in revenue for the first time in our company's history, and delivered organic revenue growth of 29%. This is now the fourth consecutive quarter where organic growth exceeded 20%, making us an industry growth leader in both our Federal Solutions and critical infrastructure segments. The strong results included double digit total revenue growth across all four business units in major geographies. We also achieved quarterly records for adjusted EBITDA in contract awards, adjusted EBITDA grew 56% and contract awards increased 51% year-over-year. Total backlog also grew 8% to a record $9 billion and we exceeded our cash flow expectations for the quarter. Our momentum is driven by our ability to deliver on our customers missions, win and ramp new contracts, grow revenue on existing contracts, achieve strong win rates, efficiently manage costs, and operate effectively in our two well-funded and growing segments.
As a result of our strong first quarter performance, we are increasing our 2024 guidance ranges for all financial metrics, which Matt will discuss in a few minutes. During the first quarter, we achieved a book-to-bill ratio of 1.4x on an enterprise basis, which included three contract wins over $100 million each. Parsons continues to win large strategic contracts across both segments supporting national security priorities and unprecedented global infrastructure spend. In our Federal Solution segment, we continue to pursue contracts that focus on near peer threats and require solutions that are driven by our exquisite cyber space, missile defense, electronic warfare and information operations capabilities. In critical infrastructure we're pursuing projects that require high-end design and program management expertise, and build on our legacy of delivering innovative solutions for complex infrastructure projects.
We are also aligned to geographic locations that receive high levels of global infrastructure funding. Strategic first quarter wins in our critical infrastructure segment include our selection by the Gateway Development Commission as the delivery partner on the $16 billion Hudson Tunnel Project, which we plan to book our portion of this contract in the second quarter of 2024. This milestone project is supported by the bipartisan Infrastructure Investment and Jobs Act, and is slated to receive nearly $12 billion in federal funding, the largest investment for a mass transit project in modern history. Over the last 12 months, Parsons has won three of the largest North America transportation wins in our company's history, the Hudson River Tunnel, JFK International Airport Roadways and Newark Bay Bridge projects.
Parsons also won two significant contracts in Saudi Arabia during the first quarter. The first was a new $87 million 3-year contract. This project is for the development of a luxury mountain tourism destination and the real estate development customers owned by the Public Investment Fund of Saudi Arabia. The second award was a $53 million contract for program management or Riyadh’s Road Network. Following the record in 2023 of 33% organic growth, Parsons continues to win work in the Middle East as a result of our strong trusted partner reputation. We expect continued double digit growth in the Middle East in 2024 given our first quarter performance, current backlog of work and our large pipeline of bid opportunities. Strategic first quarter wins within our Federal Solution segment include option period awards totaling $970 million with a confidential customer.
Also, Parsons was selected by the United States Department of Labor to assist with planning, management and oversight of the Job Corps Facilities program. We're the sole authority on $115 million [ph] contract of which we booked $46 million. Parsons has performed project management on this contract since 2013. In addition, Parsons was one of two companies awarded a position on an IDIQ contract by the National Nuclear Security Administration, Office of Nuclear Smuggling Detection and Deterrence. This $1 billion sealing value [ph] contract to deploy global counter nuclear smuggling systems represents new work for the company, and we were already awarded two task orders for $13 million. This strategic win is an important progression of our decade’s long legacy of serving global and national nonproliferation security missions.
In addition to the Department of Energy, we have supported customers including the Defense Threat Reduction Agency, Transportation Security Administration, and the Countering Weapons of Mass Destruction Office and similar missions. We were awarded a $63 million for a fixed price contract by The United States Air Force Lifecycle Management Center, of which we booked $44 million. The scope is for a directed energy laser system that has already neutralized more than 4000 unexploded ordnance, and allows for the precise detonation of submunitions, cluster and general purpose bombs, land mines and artillery shells. This is the first ground-based laser system in production and has been deployed in Iraq, Afghanistan and the Indo-Pacific region where it demonstrated 100% effectiveness.
Finally, we were awarded a one year based contract by the National Oceanic and Atmospheric Administration for system integration and cloud management services for their traffic coordination system for space. This contract is valued at $27 million, of which we booked the base value of $16 million. Under this contract, we will provide space situational awareness and space traffic coordination services to private and civil space operators. We were able to win the strategic contract by leveraging the expertise of our space team that has supported the Department of Defense for nearly two decades. We are now providing space situational awareness solutions for both, commercial and Department of Defense customers, and we are well positioned to pursue future global opportunities.
In addition to our contract wins, the Environmental Protection Agency recently issued the first national drinking water standard to protect communities from exposure to harmful PFAS or forever [ph] chemicals. The EPA estimates that 6% to 10% of the United States public drinking water systems will have to take action to comply with these new and more restrictive safety standards. This announcement includes $1 billion of newly available funding and as part of a $9 billion investment from the Bipartisan Infrastructure Bill to help communities eliminate PFAS and emerging contaminants from their drinking water. Although the markets in very early stages, we believe that PFAS mitigation offers a significant future growth opportunity for Parsons since we have the ability to investigate, remediate, treat and provide monitoring and support services for our customers.
We have already completed nearly 2000 PFAS investigations for industrial, commercial and federal clients, and we've designed and built and installed over 7000 PFAS point-of-entry treatment systems. We also designed, built and continue to operate three full-scale treatment plants to remove PFAS from drinking and wastewater. We estimate PFAS is a $40 billion addressable market for Parsons, and we expect annual spending to grow into the next decade. We continue our 80-year history of cultivating a responsible enterprise. We are proud that we were named one of the world's most ethical companies by Ethisphere for the 15th consecutive year. We also were recognized for delivering project excellence on three major infrastructure programs and honored for our diversity, equity and inclusion efforts, and for being a military friendly employer.
The company's Newark Liberty International Airport Terminal A joint venture project was named the world's best new airport terminal by the global airport evaluation firms Skytrax. This project is just one of three North American airport terminals to receive a 5-star rating from Skytrax. Additionally, the I-270 North design build project for which Parsons served as primary consultant was selected as one of the American Public Work Association's 2024 transportation projects of the year. Finally, The American Council of Engineering Companies of New York recognized Parsons with the Empire Award for the East Side Access Project for it’s significant contributions to the growth, prosperity and betterment of the community. These recognitions reiterate Parsons commitment to successfully delivering on our customers missions.
In summary, we're executing on our strategy and delivering on our customers missions as we continue to post record results and strong growth rates across all key financial metrics. Parsons has the right team and the right portfolio at a time when all of our end markets are growing between 5% and 12%. Our team is consistently delivering double digit growth across all four business units and major geographies. Our concerted effort to increase margins drove significant expansion this quarter. In addition, our cash flow and strong balance sheet are enabling us to continue to invest in technology and our employees to further differentiate our portfolio and to complete accretive [ph] acquisitions across both segments. Thus enabling us to win a significant amount of business as contract awards grew more than 50% this quarter.
As we look to the future, we have ample tailwinds in both segments. In Federal Solutions, near peer threats are driving demand for our cyber space, missile defense, electronic warfare, information operations and critical infrastructure protection capabilities. This complements the unprecedented infrastructure spending across our global portfolio. Our significant financial visibility is supported by these market tailwinds and by having less than 5% of our revenue for repeat [ph] in 2024, and less than 10% in 2025. Having a record total backlog of $9 billion, of which 61% is funded, having $14 billion of contract wins that have not yet been included in our contract awards or backlog, and having a $56 billion pipeline of opportunities to pursue.
Before I turn the call over to Matt, I want to thank and recognize the outstanding work of our talented employees. For eight decades, they have worked to make our world safer, smarter, more sustainable, and more secure. With that, I'll turn the call over to Matt to provide more details on our first quarter financial results, and our increased fiscal year 2024 guidance. Matt?
Matt Ofilos: Thank you, Carey. As Carey indicated, our momentum continued through the first quarter of 2024 and was highlighted by record results for total revenue, adjusted EBITDA, adjusted EBITDA, margin contract awards, and total backlog. We’re pleased with our double digit growth across all business units. Our Q1 margin performance also put us on our way to a 40 basis point goal for the year. Turning to our results; first quarter revenue of $1.5 billion increased 31% from the prior year period, and it was up 29% on an organic basis. Organic growth was driven by the continued ramp up on recent contract awards and execution on our backlog programs. SG&A expenses for the quarter were 14.4% of total revenue, compared to 17% in the prior year period as we intentionally focus on efficient growth across the portfolio.
We are realizing savings in areas to include facilities expenses while continuing to invest in technology, new business capture and hiring retention initiatives. Adjusted EBITDA of $141 million increased $51 million, or 56% and adjusted EBITDA margin expanded 150 basis points to 9.2% from the prior year period. These increases were driven primarily by increased volume on the margin accretive contracts, and a deliberate focus on cost management and controls. I'll turn now to our operating segments, starting first with Federal Solutions where first quarter revenue increased by $275 million, or 43% from the first quarter of 2023. This increase was driven by organic growth of 41% and the contribution from our Sealing Tech acquisition. Organic growth was driven primarily by the ramp up of recent contract wins and growth on existing contracts to include strength in our SAT [ph] cyber portfolio.
Federal Solutions adjusted EBITDA increased by $36 million or 65% from the first quarter of 2023, and adjusted EBITDA margin increased 130 basis points to 10.2%. These increases are driven primarily by increased volume on accretive contracts, effective cost controls, and a favorable adjustment related for the achievement of program milestones. Moving now to our critical infrastructure segment. First quarter revenue increased by $87 million or 16% from the first quarter of 2023. This increase was driven by organic growth of 15% and a nominal amount of revenue contribution from acquisitions. Organic growth was driven by higher volume in our Middle East and North America infrastructure portfolios. Critical infrastructure adjusted EBITDA increased by $14 million or 42% from the first quarter of 2023.
Adjusted EBITDA margin increased 140 basis points to 7.7%. The adjusted EBITDA increases were driven by higher volume on accretive programs and improved operating performance. Next, we'll discuss cash flow and balance sheet metrics. During the first quarter of 2024, we consumed $63 million of operating cash, which was better than planned. Compared to prior year the greater cash consumption was the result of timing of receipts. Additionally, there was higher incentive compensation given the company's strong fiscal year 2023 operating performance and increased employee base. During the quarter, net DSO declined by 6 days to 63 days. Capital expenditures totaled $9 million in the first quarter of 2024. CapEx continues to be well controlled and remains in line with our planned spend of less than 1% of annual revenue.
We're continuing to invest in strategic areas like classified facilities and space technology. Turning to bookings; first quarter contract award activity increased 51% year-over-year to a record $2.1 billion for a book-to-bill ratio of 1.4x. On a trailing 12-month basis, contract awards increased 41% and our book-to-bill ratio was 1.2x. In our critical infrastructure segment, we achieved a quarterly book-to-bill ratio of 1.3x in Q1. On a trailing 12-month basis, it was 1.1x. This marks our 14th consecutive quarter of the book-to-bill ratio of 1.0x or greater. On a trailing 12-month basis, our book-to-bill ratio was 1.1x. We remain optimistic that global infrastructure investment will continue to drive demand and new business well into the future.
Our Federal Solutions book-to-bill ratio for the quarter was 1.4x and 1.2x on a trailing 12-month basis. We ended the first quarter with record backlog of $9 billion, up $664 million or 8% from the prior year period. During the first quarter, we took advantage of positive market conditions and successfully issued $800 million of 2029 convertible senior notes to retire portion of our $400 million convertible notes due in 2025. As a result, we were able to obtain an attractive interest rate of [indiscernible] which provides enhanced free cash flow to continue our demonstrated capital deployment strategy. In addition, we entered into hedging transactions as part of this offering that protects shareholders from dilution upto a share price of $131 76.
We use the net proceeds from our new convertible note to repurchase approximately $285 million of our prior $400 million convertible notes, and we expect to address the remaining notes at/or before their August 2025 maturity. We intend to use the remainder of the net proceeds from the new offering for general corporate purposes, potential acquisitions and to fund working capital related for the company's growth. Thanks to strong investor demand for this offering, we achieved beneficial terms for the company from a well-timed and efficiently executed transaction. The transaction capitalized on the strength of Parsons business performance and balance sheet to achieve two key objectives. First, to raise capital at the lowest all-in cost available to Parsons; and second, to minimize potential dilution to our current shareholders by retiring the existing convertible and issuing a new convertible at a higher share price.
The transaction resulted in a $214 million pre-tax charged to our GAAP net income and impacted GAAP EPS by $1.50 per share. Excluding this impact, GAAP EPS would have been $0.49 per share. This charge was primarily due to the strength of the stock price increasing to a level above the conversion price of our original convertible bond. These GAAP charges have been excluded from our adjusted EBITDA and EPS calculations. Our balance sheet remains strong as we ended the first quarter with a net debt leverage ratio of 1.6x compared to 1.4x at the end of the first quarter of 2023. We will continue to effectively use the strength of our balance sheet to make additional internal investments and accretive acquisitions that support our long-term growth objectives.
Now, let's turn to our guidance. We are increasing all of our 2024 guidance ranges to reflect our record first quarter results, recent large contract wins and option awards, positive end-market exposure and our favorable outlook for the remainder of the year. For 2024, we are increasing our revenue range by approximately $350 million to $6.1 billion to $6.4 billion. This represents total revenue growth of 15% at the midpoint and 14% on an organic basis, which is approximately double the growth rates of our prior guidance. Additionally, we are increasing our adjusted EBITDA range, we now expect adjusted EBITDA to be between $535 million and $575 million which represents 19% growth at the midpoint of the range and continues to exceed revenue growth.
Margin at the midpoint of our increased revenue and adjusted EBITDA ranges remains at 8.9%, which is 40 basis points above our fiscal 2023 results. We're also increasing our cash flow guidance. We now expect operating cash flow to be between $380 million and $440 million. For the midpoint of the guidance range we expect free cash flow conversion to be approximately 100% of adjusted net income. Other key assumptions in connection with our 2024 guidance are outlined on Slide 11 in today's PowerPoint presentation located on our Investor Relations website. In summary, we had a very strong start to the year with great top and bottom line results and we exceeded our cash flow expectations. We also completed a successful financing transaction and are confident in our ability to achieve our increased 2024 guidance ranges.
With that, I'll turn the call back to Carey.
Carey Smith: Thank you, Matt. In closing, I'm very pleased with our start to 2024. We delivered record results for revenue, adjusted EBITDA, adjusted EBITDA margin, contract awards and total backlog. We also achieved 29% organic revenue growth, which was driven by strong growth across all four business units in major geographies, giving us the confidence to raise all of our guidance metrics. Looking forward, I'm excited about our business given the ample tailwind that we have in both segments, our strong backlog and pipeline, low [indiscernible] levels and robust balance sheet that will enable us to continue to invest in the business and make accretive acquisitions to drive future revenue growth and margin expansion. With that, we will now open the line for questions.
See also
15 Best Cuisines in the World and
17 Best Insurance Dividend Stocks To Invest In Right Now.
To continue reading the Q&A session, please click here.
