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Parsons Corp
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Good morning. My name is Jack and I will be your conference operator today. At this time, I would like to welcome everyone to the Parsons First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. David Spille, Vice President of Investor Relations. You may begin your conference.
Thank you. Good morning and thank you for joining us today to discuss our first quarter 2019 financial results. Please note that we have provided presentation slides on the Investor Relations section of our website. On the call with me today are Charles Harrington, Chairman and CEO; George Ball, CFO and Carey Smith, Chief Operating Officer.
Today, Chuck will discuss execution against our corporate strategy. George will provide an overview of our first quarter financial results and then Carey will review our operational highlights. 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 uncertainty 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 factors are described in a registration statement on Form S-1 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 and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures.
I now will turn the call over to Chuck.
Thank you, David. Welcome to all who are on the line to Parsons first quarter 2019 earnings call. We had a strong quarter across both business segments and our Q1 results reflect the success of executing on our enhance, extend, transform strategy. Financially, we delivered a strong quarter, first quarter results, which included notable increases in revenue, profitability and contract awards over the first quarter of 2018. In fact, our revenue grew 20%, our adjusted EBITDA grew 43%, and included a 120 basis point margin improvement. Total backlog increased 35%, now stands at $8.6 billion on the strength of a 1.4 book-to-bill ratio and our federal solutions revenue contribution increased to 47% of the corporate total in the quarter from 39% in the prior year.
Strategically, we closed on a key acquisition, OGSystems and as you know, recently completed our IPO. Our performance has benefited from our strategy to enhanced organic operations through strategic leadership additions, technology R&D efforts and focusing our sales on higher margin, lower working capital markets. Simultaneously, we have also executed our extend strategy to enter the geospatial intelligence, cloud computing and small satellite markets while expanding our revenue in cyber, intelligence, missile defense and intelligent transportation systems. These accomplishments coupled with the execution of our transform strategy to build our technology revenue streams and transactional revenue streams has enabled us to accelerate revenue growth, increase margins, generate strong free cash flow and bring new capabilities to our customers. Our M&A strategy added Polaris Alpha and OGSystems to our federal solutions segment in the past year.
The OGSystems acquisition was completed in early January of this year. This acquisition provides us with geospatial intelligence capabilities, increased data analytics and cloud computing expertise, additionally provides an insider’s threat detection capability for our defense and intelligence customers. Through OGSystems, we also acquired the PeARL product suite, which enables our defense and intelligence customers to analyze objects and their movements from 10,000 feet above ground and yields resolution of objects at a 4 cm accuracy. So, we are taking this same technology to our critical infrastructure market to create 3D models of existing critical infrastructure structures like bridges, reducing or eliminating the need for inspectors to take physical measurements in the field. M&A will continue to be a key initiative given our transform strategy and the strength of our balance sheet.
And finally, I want to acknowledge Parson’s tenth consecutive recognition as one of the world’s most ethical companies by the Ethisphere Institute. This award reflects our culture and commitment of our global workforce to ethical business practices. We are proud of this recognition and our commitment to integrity is one of our six core values. In summary, this first quarter, of our 75th year of operations was a success in terms of financial results and strategic actions.
With that, I am going to turn the call over to George Ball, our Chief Financial Officer to discuss our first quarter 2019 financial highlights. George?
Thank you, Chuck and good morning everyone. Today, I will organize my remarks in the four key areas: the income statement, cash flow results, balance sheet, and contract awards. I will also discuss certain financial results on an adjusted non-GAAP basis, where we believe doing so provides a meaningful comparison to our prior financial results. GAAP reconciliation tables are provided in the press release and the PowerPoint presentation which was issued this morning.
As Chuck noted, our first quarter revenue, profitability and bookings all exceeded our prior year results. Total revenue for the first quarter increased 20% and organic revenue increased 4% from the first quarter of 2018. GAAP EPS for the quarter was $0.12 per share and adjusted EPS for the quarter was $0.57 per share. Our EPS comparisons are less meaningful this quarter due to IPO transaction cost and the additional shares issued in the IPO. Total shares issued and outstanding at the conclusion of the IPO were approximately 99.4 million shares. Adjusted EBITDA increased 43% to $68 million equating to an adjusted EBITDA margin of 7.5% or a 120 basis point improvement over the prior year. This margin expansion was driven largely by the addition of our Polaris Alpha and OGSystems acquisitions, which has significantly higher margins than our legacy business as well as improved margins in our underlying legacy business.
Turning now to our operating segments and starting first with Federal Solutions, first quarter revenue grew 45% year-over-year. This increase was primarily due to the acquisitions of Polaris Alpha and OGSystems with accompanying organic growth of 3%. Federal Solutions adjusted EBITDA grew 93% and our margin expanded by 230 basis points to 9.2%. This increase was again driven largely by the acquisitions of Polaris Alpha and OGSystems as well as margin expansion in our underlying legacy business.
And now a few words regarding our Critical Infrastructure segment. First quarter revenue grew 4% organically year-over-year on the strength of growth on existing contracts. Critical Infrastructure adjusted EBITDA grew 6% and our margin expanded by 10 basis points to 6.1%. These increases were driven primarily by the aforementioned revenue increase and improved business mix and overhead cost reduction initiatives which were partially offset by targeted increases in business development costs.
Now I will turn into cash flow and balance sheet metrics. Our net DSO for the quarter was 61 days as compared to 75 days at the end of the first quarter of 2018. The decline in net DSO was driven by improved Middle East cash collections and our Critical Infrastructure segment and the acquisitions of Polaris Alpha and OGSystems, both of which have lower net DSOs than our legacy business. During the quarter, we used $60 million in operating cash flow, which represents an 8% improvement as compared to the prior year period. Cash flow tends to be lower in the first quarter as a result of incentive compensation payments and other obligations dispersed during the period. We expect solid cash flow from operations for the full year in line with or above underlying earnings.
Our first quarter 2019 balance sheet reflects gross and net debt of $659 million and $538 million respectively. However, the proceeds from our recently completed IPO reduced these amounts to approximately $250 million and $50 million respectively and we are therefore ideally positioned to continue our investment in the company’s strategy. The implementation of the new leasing standard had no notable impact on earnings in the first quarter and we anticipate no notable future impact. But its implementation did have the effect of increasing both assets and liabilities by over $200 million. As Chuck noted earlier, we reported contract awards of $1.2 billion in the first quarter, which represents a book-to-bill ratio of 1.4 times a strong performance driven largely by our Federal Solutions segment which achieved a book-to-bill ratio of 1.9 times. Total backlog at the end of Q1 is now $8.6 billion, up 35% from last year, and notably Federal Solutions now represents 60% of the Company’s backlog as compared to 50% at the end of Q1 2018.
With that, I’ll turn the call over to Carey, who will discuss some of our first quarter operational highlights. Carey?
Thank you, George. Operationally, as Chuck and George have noted, we had strong performance in both segments, and particularly strong in Federal Solutions. Our first quarter book-to-bill ratio of 1.4 times was driven by large contract awards, strong win rates, and excellent performance in the Federal Solutions segment which as George noted achieved a book-to-bill ratio of 1.9 times. Our Critical Infrastructure book-to-bill ratio was 0.9 times, which was in line with our expectations as we implement a focused bid strategy of pursuing higher margin work. We expect our book-to-bill ratio in this segment to improve throughout 2019.
We had several key awards in our Federal Solutions segment, including our cyber, intelligence, and space focused markets. First, we won $175 million re-compete award from a classified government customer to provide services relating to information technology infrastructure and industrial control systems. And in addition, we won three significant new awards. A $982 million ceiling value, multiple-award contract for the Army to provide a full spectrum of cyber electromagnetic initiatives; a $147 million award from another classified government customer to provide high-end software, hardware, integration, operations and maintenance, and mission support; and an award worth approximately $100 million by the Air Force Space and Missile Systems Center for integration services for small satellite delivery to space.
For Critical Infrastructure, we had notable contract expansion bookings, including the California Interstate 405, Gordie Howe bridge and the Southern California Gas Program. Both segments also had strong top and bottom line growth. The revenue growth was both organic, driven by early contract wins and growth on existing contracts; in the case of Federal Solutions, also inorganic. The margin expansion is the result of top line growth, strong award and incentive fees, as well as cost reduction initiatives in the Critical Infrastructure segment. Next, I would like to briefly discuss our two most recent acquisitions, Polaris Alpha and OGSystems. We are very pleased with the performance of both acquisitions, as they continue to experience double-digit revenue growth and EBITDA margins exceeding their financial targets. We’re already experiencing revenue synergies in nearly every bid as a combined Parsons, Polaris Alpha, OGSystems response. A recent example of our Polaris Alpha revenue synergy award is the Army’s defensive cyber operations mission planning contract. An example of an OGSystems’ cross segment revenue synergy award is our recent Critical Infrastructure, Dubai Roads and Transport Authority win, which leveraged our PeARL sensor system.
Finally, OGSystems, our most recent acquisition, continues to have industry-leading employee retention at 96%, which has improved since we closed the acquisition. I’m very excited about the opportunities we have to grow our business and expand our margins. We are winning more high-end work in our targeted markets and are executing well in both business segments. Our pipeline is an all-time high, and we have $3.9 billion of outstanding bids awaiting award.
On the technology front, our strategic incubator, which we call S-Works is driving growth in markets, including artificial intelligence, critical infrastructure protection, and operational energy. We formed company-wide technology community as a practice, that’s been both business segments, and we have initiated commercial product marketing strategies.
In addition, we’re investing research and development in critical areas including high-speed processing, smart cities, and border security integrated sensor systems.
With that, I will turn it back over to Chuck.
Thank you, Carey. In summary, we achieved strong growth in revenue, profitability and awards. We delivered effective execution against our strategy and we continue to transform our business, enhancing our revenue growth and margin expansion opportunities. We also have a strong balance sheet providing the financial flexibility to make continued investments in our strategy. Before, we move to the Q&A session, I want to acknowledge that our success is driven by the hard work and dedication of our nearly 16,000 employees. They are the foundation of our business. And their commitment to our customers’ missions and our core values is inspiring, and what makes Parsons a great place to work. Their achievements put us on a path to successfully execute our IPO.
Now, we’ll open up the line for questions.
Certainly. [Operator Instructions] Your first question comes from the line of Matt Sharpe with Morgan Stanley. Your line is open.
Good morning, Chuck, George and Carey. Congratulations on the IPO and the first earnings print.
Thank you.
I just wanted to talk capital deployment a bit here. So, post IPO, you guys, I think, you had a net debt number at about $50 million, and the company should generate pretty good cash going forward from here. What’s the appetite or can you give us framework around share repurchase versus M&A versus internal investment from here? Do you have any targets in terms of those buckets on a percentage basis or what can you give us just to help us contextualize your approach?
Well, given the phenomenal amount of opportunities that we believe exist in the marketplace and the strong growth that we’re getting, we’re targeting our capital deployment in the area of M&A in the near future of companies that met our acquisition criteria of high margin, high growth, companies with great IP and our focused markets of cyber Intel space, defense, and critical infrastructure in the smart cities area. So we’re not counting out the possibility in the future of making share repurchases, but in the near term we’re focused on M&A.
Got it, thanks. And just a follow up to that, so what types of companies maybe are you looking at in terms of size, in terms of market segment, are you guys considering any divestitures potentially on the critical infrastructure side?
Well, our focus area has been in the markets of cyber, intel, missile defense, space, and smart cities, leveraging our expertise in artificial intelligence, mainly machine learning, but also now expanding our deep learning capabilities, cloud migration, IOT, and autonomous systems. And we’re focused on companies that have a material amount of IP, IP either in the area of software, in software development and hardware. And – so those will retain our focus on M&A and the size of the companies we look at are fairly broad. It’s really more important to us looking at their margin, growth capabilities and alignment to our key market focus areas.
Got it. Any pressure to scale, given what some of your competitors have done or how do you think about that in the context of M&A?
We think we have the scale that we need and we’re far more focused on high margin, high growth specialty areas that really play upon our differentiated capabilities and versus scale-for-scale sake. I’m not sure that, that provides us the – what – additional capabilities and what makes us a differentiated offer, which is the agility and our speed to react. And, so we don’t see a compelling reason for scale in our core markets.
Got it, thanks. I’ll get back in the queue.
Thank you.
Your next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.
Hey, good morning, guys. This is actually Raymond Gonzalez on for Sheila.
Welcome.
Just – thank you, thank you. So, I just wanted to ask about Polaris Alpha and OGSystems. How the integrations of those two businesses are tracking versus internal plan from a cost perspective? We estimate those businesses have 12% type EBITDA margin through fiscal year ‘19. Should we think about that differently?
Well, I will say, in summary, and I’ll have Carey dive a little deeper into this. They are meeting and exceeding our expectations from both revenue generation and synergies where we saw them, in the case of Polaris Alpha. So, I think you’re what we’ve had communicated earlier, we’re on track or slightly exceeding that. Carey, any additional color you’d like to provide?
Yes, thanks, Chuck. We’re doing a great job on revenue synergies with both companies. With Polaris Alpha, we also had cost synergies, since that was a roll up of six prior companies, and we’re on track to exceed those cost synergies. With OG Systems, we did not plan on any cost synergies, so our focus is really on revenue. And as I mentioned earlier, we’ve had several key wins already with synergies and every bid that we submit involves all three companies.
Okay, great. Thank you. And just one follow-up in general on the bid pipeline. Congrats on the all-time high there. Just wanted to figure out, how has the bid pipeline grown sequentially for the two segments and how has that impacted by the focused bid strategy for Critical Infrastructure?
Yes. So, what I would say in general is, the federal marketplace right now is very robust. There’s a lot of opportunity, especially in the areas we are focused on of, cyber, intel, space, missile defense. Those are all areas where there’s a lot of focus and emphasis by the federal government. In the Critical Infrastructure space, in general, you’re right on, in that what we’re being very selective in the pursuits that we’re taking on, where that leverage our core expertise, and fit our margin and cash flow profiles.
And Carey, anything you’d like to add in terms of specific color?
I would just add that our pipeline is $20 billion awaiting notice of award is $3.9 billion. And to add on to what Chuck said, Federal Solutions is really an overdrive mode. We have quite a bit of opportunities, particularly greater than $100 million, that we will be awarded this year.
Okay. Thank you. I’ll jump in the queue.
Your next question comes from line of Edward Caso with Wells Fargo. Your line is open.
Good. Hey, welcome to the or welcome back to the public markets here. So, wondering if you could give us a look into your crystal ball about the budget. How you see that shaking out, as far as shut down, continuing resolution, whatever your crystal ball tells us?
Yes. Well, I think if I know one thing, I don’t always try to predict where these things are going to fall in specific. So, our strategy that was all aligned around getting us into those areas that we feel are going to have the highest emphasis for funding during, whether it’s sequestration, continuing resolution, which is probably the most likely outcome for a few months. And as like I’ve said before, just because we have some disagreements in Washington, the folks that are attacking us either in cyber or missile defense tests, and so forth, those don’t tend to decline during those periods. So, we think our areas are as insulated from that as possible in the federal spend.
Your revenue number came in a little higher, and we were looking for whether some pass-throughs in the quarter or lower margin pass-throughs that raised the number?
They just tend to be in some parts of our business, the revenue numbers tend to be a little lumpier than others. Obviously, our margins were very strong. So, it really wasn’t pass-through costs so much, it’s just more, maybe a little acceleration on a few programs. They were they staffed or just went a little faster than we had anticipated, they would in Q1.
Last question, can you give us a sense, since you didn’t offer any guidance today, what’s your approach will be to giving guidance? Thank you.
Yes. George, you want to take that please?
Sure. Ed, we’re planning to provide guidance beginning in 2020, which will communicate on our fourth quarter call, probably early March.
Great. Thank you.
Thank you, Ed.
Thank you.
Your next question comes from line of Ron Epstein with Bank of America/Merrill Lynch. Your line is open.
Hi, good morning. This is Natalie O’Dea for Ron Epstein. My question, so your growth...
Welcome Natalie.
Thank you. So, your growth strategy is predicated on targeting more advanced technologies that provide additional capabilities in Federal Solutions. I think you’ve already touched on what you look for in a target. Can you talk about your thresholds for return? And then as a follow-up, you’ve been acquiring higher margin businesses in Federal Solutions, so how do you maintain those higher margins over time as you absorb them? Thanks.
Yes, great question. So, one, the companies that we buy, we always look for accretion of margins in a relatively quick time frame, certainly less than 18 months and have been more like a year. Since the areas we’re going into, we’re not rolling additional overhead onto our units, so we do a really great job of maintaining if not expanding the margins of the acquisitions we buy. And our model has been to develop technology in the Federal space and then bring that technology to our Critical Infrastructure space. So, for a vast majority of the technology we create, we have actually two market segments we can deploy that technology in. We talked about our pearl sensors we’ve talked about Domain6 in the past. Many of those software solutions deployed to both. So, we continue that margin increase. And actually, you can look at the R&D investment it’s having two market segments worth of growth revenues, off of one R&D investment.
Thank you.
Your next question comes from the line of Tobey Sommer with SunTrust. Your line is open.
Thank you. I was going to ask you a question about margins, which you showed really nice expansion, I guess, driven primarily in the Federal Solutions space. How did the business performance, how does that compare to contract awards? And then, when you look at your backlog and the potential margin associated with that, did you see margins continuing to improve as a result of the visibility that you have in contract awards and backlog?
Yes. So, when we look at margin and margin expansion profile on a go-forward basis, there’s really a couple of things that are driving that. One, the work we’re selling and have been selling over the last year or plus, has been at higher margins than what we’ve sold in the past. So, you’ve got we’ve got strong margin organic margin growth profiles in our backlog. Two, we’ve been working through our enhanced strategy to increase the margins in our ongoing work by continuing to streamline our overhead in G&A, make other growth opportunities on existing contracts to expand margins.
Our M&A, it has been at higher margins, so that adds into this as well. And then, lastly our move to create more technology and transactional revenue streams, which also contribute to margin expansion. So, we see continued growth of margins in the foreseeable future.
Thanks. And when I look at the book-to-bill 1.4, is there a way that you could characterize that in terms of your Enhance, Extend, transform strategy and kind of give us some color as to which element might have been most pronounced within the 1.4?
Yes. So, I’ll have Carey dive into that a little deeper. But what I can tell you is, for the most part of that 1.4 book-to-bill, you are seeing a more efficient sales and business development operation, which allows us to be more efficient with that B&T that we’re spending, and that’s part of Enhance. Extend is what has moved us into these high growth markets, and most of those sales are coming out of that. And the Transform is that has really led the M&A profile and is now developing that increased emphasis on transactional and what we call technology led. So, as Carey will expand upon the sales process, we lead with the sale of IP and follow that up with services. Carey, you want to take that and run?
Sure. As you look at Q1 and particularly the Federal Solutions book-to-bill of 1.9 times, it really was based on extending into adjacent markets. We have a predominant position now within the cyber security area, the intelligence market, as well as the space. And our big wins that were greater than $100 million came out of each of those adjacent market areas.
We may also mention to you that; we’ve seen just an exceptional growth in the area of missile defense as well.
That’s correct and that’s predominantly on contract growth where we have over 1,000 employees that’s part of missile defense and systems engineering, weapons and missile system, and facilities in lifecycle support and warfighter support.
Thank you very much.
[Operator Instructions] Your next question comes from the line of Cai von Rumohr with Cowen & Company. Your line is open.
Hi. This is Dan Flick on for Cai. Good morning.
Good morning.
So, your initial share on the LOGCAP contract was small. Is there a potential to expand that share throughout the life of the contract? And if so, how big might that opportunity be? Thank you.
For us and I’ll have Carey go into a little more depth. But our focus on LOGCAP is to bring technology solutions to that. So, to the extent that the LOGCAP contracts or specific tasks that are assigned to that have increased technology needs then that share will grow. But our focus is the technology side of LOGCAP.
On LOGCAP, we’re a minority joint venture partner. We were awarded the SOUTHCOM region. The contract is currently under protest, for Parsons, this represents all new work. So, we don’t have any existing LOGCAP work. So, we were pleased to get the SOUTHCOM region. As we come through the protest, we would only have additional upside.
Got it. Thank you.
Your next question comes from the line of Tobey Sommer with SunTrust. Your line is open.
Thank you. Y/ou cited three substantial single award contracts. I’m curious, if there’s something that you could describe within the Company or within the customer set, that’s kind of driving these larger awards. And then you call them out, so is that an unusual amount or should that be considered something that historically is at a cadence that you would consider normal? Thanks.
Hi, we’d like to call this our new normal. So, if you look at where we started with this strategy, two, three years ago, oftentimes, we were getting into these markets as really critical subcontract roles, and now we’ve moved to the prime role. And this is the kind of cadence that we expect on a quarter-to-quarter basis. And Carey, would you like to expand upon that?
Sure. One of the contracts was to re-compete of which were performing facilities work and infrastructure work, industrial control systems, as well as information technology. The other one was in the cyber security domain, it was a single-sourced award for a classified customer, where we’re uniquely qualified to be able to provide software and hardware solutions that support their critical missions. Additionally, our space award, it got us into a new market, which is basically the launch of small satellites that go up with a primary payload, it’s called the Launch Manifest System Integrator contract. That contract was awarded by the Air Force, but will also potentially service NASA, and National Reconnaissance organization and other customers. And finally, another one that I would highlight that we’re very proud of was Defensive Cyber Operations, where we’re the lead system integrator for the Army’s defensive cyber programs, program of record. We have close to 20 contracts that are over $100 million that will be awarded this year.
Thank you very much.
Your next question comes from the line of Matt Sharpe with Morgan Stanley. Your line is open. Matt Sharpe, your line is open.
Sorry, about that. I just want to talk networking capital for a moment here. I believe you guys made some progress on DSO days. But, in general, I think the Company has run a little bit higher than most peers. Is it a structural issue? What type of opportunity you guys have to drive that down and sort of provide a tailwind here, free cash flow going forward?
Matt, yes, this is George. We’ve made considerable progress on that over the past couple of years, but we still do have additional opportunities, largely in the Critical Infrastructure segment, probably a bit more oriented in the Middle East. And in the Federal side, there are a number of large programs with considerable retention and back-end loaded award, fees and the like that we think we’ll see some liquidation as well. So, going forward, I would say over the next, let’s say, 18-month time horizon, we should see continual tailwinds.
Okay, got it. Thanks. That helps. And then, just I know we’ve talked bookings quite a bit. But I want to touch in particular on LOGCAP as well as the Army R4 contract, those were both incremental awards to the Company. So, getting a sense here, of the ramp up in the path forward, how we should think about that, I mean, whether or not that was incremental in fact to your plan, say a few months ago or whether it was already baked into some extent?
Sure. And also, the other classified contract I mentioned was incremental of a plan as well as the space contract. The R4 contract is a multiple-award contract and we’ve just received a request for proposal for the first task order on that contract which we’re bidding now. On LOGCAP, it’s very hard to estimate, since it is under multiple protests, when the protest resolution will be decided. But we do not have anything baked into our plan for LOGCAP. So, everything we get there is going to be upside.
Got it. Thank you.
And that is all the time we have for questions. I would now like to turn the call back over to Dave Spille for his final remarks.
Thanks, Jack. 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.
This concludes the Parson first quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.