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PARSONS CORP (NYSE:PSN)
Q3 2021 Earnings Call
Nov 5, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Third Quarter 2021 Parsons Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]

I'd now like to hand the conference over to Dave Spille, Head of Investor Relations.

Dave Spille -- Senior Vice President of Investor Relations

Thank you. Good morning and thank you for joining us today to discuss our third quarter 2021 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, President and CEO; and George Ball, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then George will provide an overview of our third quarter financial results. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance, and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2020 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 Carey.

Carey Smith -- Chief Executive Officer

Thank you, Dave. I want to welcome everyone to Persons' Third Quarter 2021 Earnings Call. We had a good third quarter, as we delivered on the strategic and financial objectives, we established at the end of the second quarter.

We reported strong sequential revenue growth of 9% with 7% organic. Won significant contract awards, including five worth more than $100 million, which was a company record. Achieved record backlog, reported solid margins in both business segments, delivered critical program performance results, closed two important acquisitions. And implemented a $100 million share repurchase program, which supports our drive to create shareholder value. We also continue to strengthen our executive leadership team with the announcement of two new business unit Presidents and I'm encouraged by the strong hiring activity we experienced in the quarter.

Finally, we are confirming all of our 2021 guidance ranges. As discussed on our last earnings call, we have three immediate priorities, deliver on our customers' critical missions, close out legacy Critical Infrastructure programs, and drive organic revenue growth. In terms of delivering on our customer's critical missions, we continue to receive strong customer satisfaction scores based upon our excellent program execution. This is further validated by delivering year-to-date repeat win rates of nearly 100% and more than 90% achievement of average incentive and award fees.

Our Salt Waste Processing Facility program also received notable recognition as the finalist for 2021 project of the year by the Project Management Institute. Although, we take much pride in our program performance, as I indicated last quarter, one of our top priorities is complete legacy Critical Infrastructure programs awarded prior to our May 2019 IPO, which contain work we no longer pursue such as prime construction. During the third quarter, we had two legacy programs that experienced write-downs, the details of which George will discuss in a moment. Overall, as discussed on prior quarter earnings calls, we've reduced our project risk profile by not priming construction work and enhancing program performance oversight.

We made meaningful progress in the quarter, toward the completion of several of these legacy Critical Infrastructure programs. In terms of our organic growth priority, we remain focused on moving up the solutions-integrator value chain, embedding and winning larger prime contracts. I'm pleased to report that we achieved significant progress during the third quarter as demonstrated by our sequential organic growth of 7% and positive hiring trajectory. We continue to win large deals that are tied to the administration's commitment to the deterring near-peer threats, and support Environmental, Social and Governance or ESG initiatives and advance the nation's infrastructure.

During the third quarter, we achieved a book-to-bill ratio of 1.5 times on an enterprise basis, as well as in both segments. This comes one quarter after reporting a record quarterly book-to-bill ratio in Q2 for both Parsons and our Federal Solutions segment. Also, in our Critical Infrastructure segment, we have had four consecutive quarters, with a book-to-bill ratio of over 1.0 times, resulting in a trailing 12-month book-to-bill of 1.2 times. In the Federal Solutions segment, we achieved a trailing 12-month book-to-bill ratio of 1.4 times. And overall for Parsons a 1.3 times trailing 12 month book-to-bill ratio.

It's also worth highlighting that we won five single-award contracts worth more than $100 million during the third quarter, which is the most in a single quarter in Parsons' history. We were awarded a single-award IDIQ contract with a $953 million ceiling value, under which Parsons will lead an industry team to design, procure, integrate, operate and maintain Air Base Air Defense systems across the European and African continents and support the United States Air Forces. This win shows our ability to move up the solutions integrator value chain. We were awarded $556 million recompete contract with a classified customer. This win further demonstrates our track record of securing our critical repeat contracts.

We were awarded $145 million contract with the Army Corps of Engineers, to develop a facility to treat hazardous energetic waste streams from the Radford Army Ammunition Plant. This is another important environmental remediation win that underpins our ESG strategy. We were also awarded $139 million contract by the Space and Missile Systems Center for satellite operations, prototyping and integration for support and delivery, network infrastructure, hardware and architecture solutions. We continue to be a technology disruptor in the space market. In addition, we were awarded $126 million contract with Saudi Arabia's Ministry of Housing to provide program management services for the development of affordable housing. During my visit in the Middle East last month, I was pleased to see the robust infrastructure growth opportunity that exists.

We also won prime positions on six multiple award IDIQ contracts. Two have multi-billion dollar ceiling values, and four have ceiling values between $50 million and $250 million each. As we've indicated on prior earnings calls, we continue to be conservative in our approach to bookings, a large single-award contract and we often do not book the entire contract value. In addition, we only book awards under multiple-award IDIQ vehicles as we win specific task orders. In addition to winning a significant amount of new business, we are focused on hiring and retaining to best talent to drive organic revenue growth. In our last earnings call, I report on the hiring of our new Chief Human Resource Officer, or CHRO. Since that time, we've made several additional strategic hires, including a recognized growth leader to run our Critical Infrastructure Connected Communities business unit.

We also promoted our proven performer in driving organic growth to lead our Federal Solutions Engineered Systems business unit. In addition, we achieved notable success in increasing our billable hiring during the quarter, producing our best hiring months in August, September and October in the last two years. And in spite of the competitive hiring market, our attrition has remained flat and in line with the industry average. In just a short period of time, the changes implemented by our new CHRO have yielded encouraging results in both hiring and retention. We continue to maintain our robust balance sheet, which supports our internal and external investments to drive growth and increase shareholder value. During the third quarter, we closed our strategic BlackHorse Solutions and Echo Ridge acquisitions. In terms of our markets, we will remain well positioned for future spending priorities in both segments with strong alignment to macro environment trends. In Federal Solutions, we continue to win work in areas that are aligned with the Biden administration, cyber, C5ISR, artificial intelligence, missile defense and space priorities.

Within Critical Infrastructure, we expect to benefit from increased investments with or without United States Infrastructure Bill. In this segment, our sustainable solutions are aligned with the administration's priority infrastructure and ESG initiatives in transportation, environmental remediation, water and wastewater treatment, and the elimination of emerging contaminants. We are also well positioned to offer secure and resilient infrastructure given our extensive federal cybersecurity credentials. In addition, we see growing infrastructure demand in both Canada and the Middle East.

In summary, we accomplished a great deal against our strategic objectives in the third quarter. We reported strong sequential organic revenue growth, won a significant amount of new business tied to national security and ESG priorities made important improvements in both hiring and retention, continue to deliver a mission success for our customers and achieved solid margins in our core markets.

As I look forward, I remain very excited about our outlook. We are well positioned into growing, enduring unprofitable segments. We've solidified our core business with the $2.2 billion TEAMS, and $550 million classified recompete wins, as well as other new business wins in the third quarter. We've upgraded talent in key areas and made notable strides in recruiting and retention to drive organic growth. We remain confident in our ability to achieve our 2021 guidance ranges, and believe the momentum we are seeing across both segments will continue to build as we move through the fourth quarter and into 2022.

With that, I'll turn the call over to George to discuss our third quarter financial highlights. George?

George Ball -- Chief Financial Officer

Thank you, Carey. As Carey indicated third quarter results were highlighted by the strong sequential revenue growth, significant contract awards and increased hiring activity. Today, I'll focus to majority of my remarks with respect to third quarter 2021 performance within the context of a sequential comparison to the previous quarter. This consistent with our comments on our last earnings call around anticipated growth in the second half of 2021.

As stated earlier, we had two Critical Infrastructure legacy program write-downs in the third quarter. One impacted revenue by $6.3 million and adjusted EBITDA by $6.7 million. And the second impacted equity in earnings, and adjusted EBITDA by $5.5 million. In both cases, we experienced schedule delays and cost escalation. Although, more work remains to be done, we are encouraged by meaningful progress made during the quarter toward the completion of these and other projects.

Moving on to our third quarter results. Total revenue for the third quarter increased 9% from the second quarter of 2021 and was up 7%, excluding approximately $18 million of revenue from our BlackHorse and Echo Ridge acquisitions. These increases were driven by higher volume on existing contracts and recent contract awards as well as a reduction in write-downs. SG&A expenses were relatively unchanged from the second quarter of 2021. Adjusted EBITDA of $84 million represents an increase of $19 million or 28% from last quarter, and adjusted EBITDA margin increased 130 basis points to 8.8%. These increases were driven primarily by a net $10 million reduction in legacy program write-downs, higher volume on existing contracts and recent contract awards as well as acquisitions.

I'll turn now to our operating segments, starting first with Federal Solutions, where third quarter revenue increased by 57%, or 13%, from the second quarter of 2021. The increase in revenue was driven by higher business volume on existing contracts and recent contract awards at $18 million associated with the acquisitions of BlackHorse and Echo Ridge. Excluding the impact of those acquisitions, revenue increased 9% organically in Q3, as compared to the previous quarter. Federal Solutions adjusted EBITDA increased $14 million or 43% for the second quarter of 2021 and adjusted EBITDA margin increased 190 basis points to 9.3%. These increases were driven primarily by higher volume on existing contracts and recent contract awards, acquisitions as well as the absence of write-downs in the current quarter.

Moving now to our Critical Infrastructure Segment. Third quarter revenue increased by $20 million, or 5%, from the second quarter of 2021; this increase was driven primarily by a $13 million reduction in write-downs and higher revenue from recent contract awards. Critical Infrastructure adjusted EBITDA increased by $5 million, or 14%, from the second quarter of 2021. This increase was driven primarily by a $3 million net reduction in write-downs, and an increase in business volume. Critical Infrastructure adjusted EBITDA margin increased 70 basis points to 8.3%.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of the third quarter was 68 days, compared to 67 days at the end of the second quarter of 2021. Our third quarter operating cash flow totaled $77 million following a seasonally strong $104 million of cash flow in the second quarter of 2021.

Operating cash flow for the first nine months of 2021 totaled $116 million, compared to $113 million in the prior year period. Capital expenditures totaled $4 million in the third quarter, compared to $6 million in the prior year period. Our balance sheet remains very strong. We ended the quarter with a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.0 times. In addition to deploying capital for M&A to enhance our capabilities, and expand our customer base. Our Board of Directors recently authorized a $100 million share repurchase program as it means to drive incremental shareholder value. During the third quarter, we repurchased approximately 245,000 shares for an aggregate purchase price of $8.7 million in connection with this authorization.

Turning to bookings for the third quarter. We reported contract awards of $1 billion, representing a book-to-bill ratio at 1.1 times on an enterprise basis and also within both segments. On a trailing 12-month basis, our book-to-bill ratio as a healthy 1.3 times with Federal Solutions at 1.4 and Critical Infrastructure at 1.2. Our backlog at the end of the third quarter totaled $8.6 billion, up 2% from the second quarter of 2021 and 10% over the third quarter of 2020. Total backlog continues to represent more than two years of annual revenue.

Now, let's turn to our guidance. We are reiterating all of our 2021 ranges provided on August 4, based on our financial results for the first nine months of this year and our outlook for the fourth quarter. Key assumptions in connection with our 2021 guidance are outlined on Slide 10 in today's PowerPoint presentation, located on our Investor Relations website.

And with that, I'll turn the call back over to Carey.

Carey Smith -- Chief Executive Officer

Thank you, George. I'm pleased with our third quarter performance and believe business momentum will continue as we move through the fourth quarter and into 2022. We had strong sequential organic growth, continued excellent book-to-bill in both segments, accelerated our hiring and strengthened our executive leadership team. We're positioned into profitable and enduring high-growth markets. Finally, we will leverage our balance sheet for internal and external investments to drive future growth. I look forward to updating you on our progress during our fourth quarter earnings call in February.

With that, we will now open the line for questions.

Questions and Answers:

Operator

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

Sheila Kahyaoglu -- Jefferies -- Analyst

Good morning, guys and thank you for the time. Carey, you announced a lot of new wins in the quarter and lots of contracts. As we think about these new wins, how much of that contributes to 2022? And maybe if you could give us some of those offsets, what's up for recompete, but also project completions that might be moving off?

Carey Smith -- Chief Executive Officer

Sure. Sheila, thank you for the question. So, first, I'll cover the single-award contracts, since it is the most important. Four of the five single-award contracts are immediate work, meaning that they're not ceiling values, which you have to drive task orders to. So the classified program is a contract that we've been performing for a few decades. And that program is going to have an increased ceiling, due to expected additional customers being added to the contract. That's the one that was $556 million. The Radford contract, $145 million basically is a project performance contract. So that will expand over the 5-year project performance. The satellite prototype integration is a continuation of efforts that we've been doing for Space and Missile Systems Center. But that effort is expanding. In fact, we're rapidly hiring new hires every week to meet the demand. The Ministry of Housing is also immediate work that's follow on to work that we've been performing since 2011 in Saudi Arabia, and that is steady-state work. So really, four of the five reflect immediate work, that's going to be additional. And then the one that is a little bit of an outlier would be the Air Base Air Defense, that's a GSA fed system contract. So we need to bring work to the vehicle. We have an initial task order. And that from there, we'll be adding additional task orders as we go. I'm also very inspired by the hiring that we've achieved. It really means a lot to have three solid months and our best since October 2019. So what that says is, we will be able to achieve this growth and start to realize the revenue from those wins that we've achieved. As far as program completions, the ones that we've talked in the past are pretty much behind us, positive train control within the Critical Infrastructure area. And then, within the Federal Solutions area, we had one job that we didn't bid this year, that was just a procurement job that didn't have any margin on it. The only other large one within Federal Solutions that will end in 2022 would be Salt Waste Processing Facility.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you. And then, maybe I'll ask one on topics as well. You have a pretty big implied step-up in Q4 to 9% margins from about 8% year to date. How do we think about the margin ramp into the fourth quarter?

Carey Smith -- Chief Executive Officer

Yes, so first, I would say again, based on our staffing momentum that we have, the additional revenue that's going to be assessed, we'll have the addition of BlackHorse acquisition, which will be there for the full quarter. The new wins, obviously, are helping, the continued less pass-throughs I just mentioned. And then, we're expecting minimal to no write-downs as we go into the fourth quarter.

Sheila Kahyaoglu -- Jefferies -- Analyst

Great, thank you.

Operator

Our next question comes from Tobey Sommer with Truist Securities.

Tobey Sommer -- Truist Securities -- Analyst

If I could start up by asking a sort of follow-up on the write-downs in the quarter. Could you give more color on that? And, specifically, is that a function of the tight labor market and supply chain issues? I'd appreciate a little bit more perspective. Thank you.

Carey Smith -- Chief Executive Officer

Certainly. So, first, we're not seeing an impact from supply chain, so that doesn't affect our business. From the two write-down perspective, one was a program in Connected Communities, a legacy program bid back in 2015. We're almost at completion of that contract, 95% complete. We actually had several key performance milestones achieved during the quarter. And that program will successfully wind up at this point in time. The second one was the Mobility Solutions that we have talked about on past calls, where we are not the managing partner. We've provided additional oversight to help the managing partner. We're approaching 70% completion on that job. We're encouraged by the progress that we've made, but we still have a little bit of work to do.

Tobey Sommer -- Truist Securities -- Analyst

And are there any ongoing lessons learned from that in terms of your forward outlook for bidding and kind of business development? Are you less inclined to be a junior partner or this is just a specific situation?

Carey Smith -- Chief Executive Officer

We've had a lot of lessons learned. So we have changed our bidding philosophy. And the programs that I've talked about were all bid back pre-2016, awarded pre-2019. So we really changed our philosophy back in 2019. We do prefer to be a managing partner, not a minority partner. We're no longer priming construction work. We've de-risked the company by putting in place bid guidelines that we follow. And those are along the lines of the type of work that we will and we won't perform. We also have selective partners that we will and we won't work with. We're focusing predominantly on design work as well as owner's engineer work, which is where our pure strengths are. We have very regular program review meetings. We also have a dedicated independent cost estimating system process that we've put into place. We have bid margins, so we don't bid anything that's below 10% EBITDA margin and put significant contingency where needed. We strengthened our joint-venture board representation. And we also have a full-time risk leader that takes over programs as necessary. And then, finally, I hired the two recent changes that we made to the executive leadership team, the leader is coming into Connected Communities, very strong leader, aviation, rail and transit, smart mobility background from a couple of decades in a major company; and then the internal leader that we promoted, who had been running our industrial business, very strong operational background to take over Engineered Systems.

Tobey Sommer -- Truist Securities -- Analyst

Thank you. Last question for me. Could you comment on and give us some color on the vaccine mandate in perhaps some numerical questions that I'd love a perspective on? What proportion of your employees today are vaccinated, and how do you estimate the percentage of employees that when the vaccine mandate arrives, you may lose? Thanks.

Carey Smith -- Chief Executive Officer

Certainly, Tobey. In this scenario, obviously, we've had a lot of focus on. As you're aware, the Executive Order 14042 applies to employees that are working or in connection with covered federal contracts, as well as employees that share workplaces with such employees or come into contact with them. The date given was December 8 to comply, but for the guidance that we received on Monday from the White House, it's not a clip. So the contractors have to be showing progress toward compliance if it's not achieved. At Parsons from the beginning of COVID, we've been encouraging employees to be vaccinated. We've also asked that they upload their vaccination status, so that we can track it at a company level. And we're working very closely with those employees, who have requested accommodations due to medical or religious reasons. We're also deeply involved with us the management budget in the industry associations to stay current on the latest guidance and help shape that guidance before it's released. And answer to your specific question, fortunately, a substantial majority of our employees are vaccinated, and we're fortunate that we have a diversified portfolio. So if you look at our company, the executive order doesn't apply to about 35% a company. And that would be our employees that are based in Canada, as well as the Middle East, and parts of the Critical Infrastructure business that are not under federal contracts. We're doing everything we can to work with our employees. And we're also proactively increasing our hiring as you've seen by our results over the last three months.

Operator

[Operator Instructions] Our next question comes from Gavin Parsons with Goldman Sachs.

Gavin Parsons -- Goldman Sachs -- Analyst

Good morning.

Carey Smith -- Chief Executive Officer

Good morning, Gavin.

Gavin Parsons -- Goldman Sachs -- Analyst

So, I think for the year, the recent revenues declining organically in both segments, you attributed to a slower start of new work, maybe some award delays that weren't able to offset the program completion you're experiencing this year. So maybe can you give us an update on the ramp up of that work, whether or not you're still seeing award delays? And any early thoughts on what that means for 2022 whether you can get back to 2020 levels of revenue? Thank you.

Carey Smith -- Chief Executive Officer

Yes, so the question is slower start of award delays, we are seeing a ramp up on the contracts, again, that was demonstrated, I think, by our revenue achievement or hiring that we've had over the last three months, really not seeing a lot of award delays. I mean, the only exception, it's a very small portion of our business would be with our restricted customer in Maryland. But other than that, things are moving forward. And this obviously was our best award month for major awards that we've had in Parsons' history. As far as 2022, we're in the process right now of putting together our operating plan, doing all the puts and takes, as we talked about on the last earnings call. And we will release guidance information in February at our fourth quarter call.

Gavin Parsons -- Goldman Sachs -- Analyst

Fair enough. And then maybe just thinking about the record backlog, how long does it take for you to ramp up on that and what's the risk? Is it just ability to hire enough people? Is it getting funded task orders on that? What do you need to execute on the backlog?

Carey Smith -- Chief Executive Officer

So on the backlog, we have a mix of programs, and as I discussed, some of them hit immediately in its hiring. So like four of the five that we won this quarter, we have to immediately hire, which is a good position to be in. Other ones, we do have a ceiling value and we have to ramp up task orders. A great example, the FEDSIM contract, so the combatant commanders, the one that I will use that was awarded late 2019 for $519 million it was our largest cyber-contract. We've now got that contract at a steady state run rate as you would expect on an annual basis. So there's a little bit of kind of a lag as you get the task orders placed on contract. So that would apply to also our C5ISR exercises operations information contract, and their base area defense contracts that I just mentioned. But otherwise, our other wins hit immediately, and it's all about hiring.

Gavin Parsons -- Goldman Sachs -- Analyst

Okay. Thank you, Carey.

Carey Smith -- Chief Executive Officer

Thank you, Gavin.

Operator

[Operator Instructions] Our next question comes from Cai von Rumohr with Cowen.

Cai von Rumohr -- Cowen & Company -- Analyst

Yes, thanks so much for taking the question. So you've done a fair amount of hiring at the executive level, Carey. Do you have any more plans, I mean, obviously, I know, you might have some bluebird, but do you have any specific plans for more hiring and changes?

Carey Smith -- Chief Executive Officer

No, I don't at this time, Cai. I want to highlight kind of the talent that we brought into the business, which really, I think reflects on our brand and what we're accomplishing in the marketplace. We've brought in people from significant tier-one companies and just very pleased. If you look across, and in fact, the results are showing it, a new CHRO, a new Head of Communications, a new head of government relations, we also brought in an Executive VP of Finance, that's going to be supporting George. We've hired two new business unit Presidents that really are able to hit the ground running. So I'm very pleased with our executive leadership team. And this will be the team that will take us forward.

Cai von Rumohr -- Cowen & Company -- Analyst

Terrific, thank you very much. And secondly, if you could talk a little bit about revenues, two questions. First, where are we with Antarctica and Kwajalein? When are those likely to ramp up again? And secondly, normally you have a seasonal downtick in both of your businesses in the fourth quarter. I mean, given the number of wins that you have, should we look for that same pattern? Or is that the some chance that could be different this time?

Carey Smith -- Chief Executive Officer

Sure. So, on Kwajalein, we anticipate that restarting in the first quarter of next year. And so, we'll be doing the asphalt paving work as that restarts. Antarctica is undergoing a modernization program refresh. So they're stepping back and saying which capital projects do they want to proceed with. We'll continue with our core services that we bid. But some of the other projects under Antarctica, they're reprioritizing based upon the budget outcome. So we're working closely with them on that effort. As far as seasonal downtick, that was largely used to be related more to our construction business. As we've started to wind down that business, that has less of an impact to the company. And we've also done something as far as our paid time off. We've allowed employees to defer that. And we're seeing some benefit from that or billable hours.

Cai von Rumohr -- Cowen & Company -- Analyst

Excellent. Thank you.

Carey Smith -- Chief Executive Officer

Thank you.

Operator

That's all the time we have for questions today. I'd like to turn the call back to Dave Spille for closing remarks.

Dave Spille -- Senior Vice President of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Dave Spille -- Senior Vice President of Investor Relations

Carey Smith -- Chief Executive Officer

George Ball -- Chief Financial Officer

Sheila Kahyaoglu -- Jefferies -- Analyst

Tobey Sommer -- Truist Securities -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Cai von Rumohr -- Cowen & Company -- Analyst

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