(PSN)
Q1 2026 Earnings-Transcript
Parsons Corporation beats earnings expectations. Reported EPS is $0.79, expectations were $0.7.
Operator: Thank you for standing by, and welcome to Parsons Corporation’s First Quarter 2026 Earnings Conference Call. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, David Spilly, Vice President, Investor Relations. Please go ahead, sir.
David Spille: Good morning, and thank you for joining us today to discuss our first quarter 2026 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 Apoulos, 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 2026 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, 2025, 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 the comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. And now I’ll turn the call over to Carey.
Carey Smith: Thank you, Dave. Good morning. Welcome to Parsons’ First Quarter 2026 Earnings Call. I want to begin by recognizing the dedication and performance of Parsons’ more than 21,000 employees who delivered a strong start to the year. Most importantly, I’m pleased to share that our 7,500 team members in the Middle East region have remained safe during the current regional conflict. They’ve shown tremendous resilience in managing volatility while continuing to deliver our customers’ critical missions. As we’ll discuss later in the call, our Middle East business produced solid financial results this quarter, and I am very proud of what the team has achieved. As demonstrated by the current military operations, our differentiated solutions spanning cyber, electronic warfare, air-based defense, countermanned aerial systems and intelligence and operations centers are vitally important to protecting both our nations and our allied security.
Post conflict, Parsons is prepared to support the Middle East on its path to recovery by providing essential capabilities, including critical infrastructure protection, air-based defense, integrated air and missile defense, transportation solutions and the reconstruction of conflict-affected areas. We believe Parsons is well positioned to advance allied priorities with our nearly 70 years in the region, extensive footprint and performance reputation. We are proud of the work we do in defense, security and infrastructure for our global customers. The first quarter highlighted the resilience of our business and our team’s high level of execution as we delivered our highest adjusted EBITDA margin ever, reached record levels for both total and funded backlog, achieved a robust book-to-bill ratio of 1.4x in both segments and generated record first quarter cash flow.
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Revenue performance was in line with our expectations, and we continue to complement our organic growth with strategic accretive acquisitions that enhance our differentiation and drive long-term shareholder value. Looking at our first quarter financials in more detail, total revenue increased by 8% and organic revenue grew 3%, excluding our confidential contract. This total revenue growth was driven by 12% growth in our Federal Solutions segment and 3% growth in Critical Infrastructure. Our record adjusted EBITDA margin of 10.1% was driven by a 10.8% margin in Critical Infrastructure, marking our highest first quarter performance in that segment. The 50 basis points of margin expansion at the corporate level in Q1 builds on the 40 basis points of expansion we delivered in the first quarter of 2025.
In addition, we significantly exceeded our cash flow target and closed the quarter with record total and funded backlog of $9.3 billion and $6.6 billion, respectively. On the bookings front, contract awards increased 17% year-over-year, resulting in a strong book-to-bill ratio of 1.4x. Our Critical Infrastructure segment reported a book-to-bill of 1.4 for the quarter, marking 22 consecutive quarters above 1.0. Performance in the Middle East was outstanding with a book-to-bill ratio of 1.5. In Federal Solutions, contract awards increased 38% year-over-year, resulting in a book-to-bill ratio of 1.4x. These strong bookings provide a foundation for continued organic growth in both segments. A key driver of our future performance is the strategic importance of our contract wins.
During the first quarter, we secured 4 single award contracts valued at more than $100 million. These included a $593 million contract extension under the Federal Aviation Administration’s Technical Support Services or TSSC 5 contract with $410 million booked in Q1. This award exercises the first option period, extends performance through 2030 and supports the FAA’s aviation system capital investment plan. TSST V has a $1.8 billion ceiling value with a 4-year base period and 2 3-year option periods. We received a production award notification from the United States Cyber Command for the Joint Cyber Hunt Kit solution, a new sole-source contract with a ceiling value of up to $500 million with $250 million booked in Q1. Importantly, this contract was another transaction agreement, which allows for faster, customized and collaborative industry partnerships.
Parsons is an industry leader in the use of these rapid delivery vehicles. We were awarded a new 5-year contract valued at over $340 million to provide program management services for a major transportation project in the Middle East, booking over $300 million in Q1. Our transportation work in the region spans rail and transit, roads and highways, bridges, airports and intelligent transportation systems. We were awarded more than $145 million under the Garden contract. Under these task orders, Parsons will enhance command and control, space and intelligent surveillance and reconnaissance technologies for the Air Force and other federal customers. We will develop and sustain next-generation software, deliver on-site training and rapidly deploy advanced mission applications.
We booked $38 million on these contracts during the first quarter. We also received an additional $150 million on 2 contracts to continue serving as the main construction manager for remediation projects on the Faro mine and giant mining programs in Canada, 2 of the largest and most complex mine reclamation projects in the world. We booked the full amount on these contracts during the first quarter. After the first quarter ended, we received 4 more strategic federal awards previously unannounced. First, we were awarded $400 million for 2 other transaction agreements, each having a 3-year period of performance. This new work shows the continued demand for our mission-critical defense and intelligence capabilities and our ability to deliver solutions to our national security customer base rapidly.
Next, we were awarded a single award classified IDIQ contract with a ceiling value of $184 million over 7 years that represents entirely new work for the company. We were awarded this contract based on our differentiated technology, including our unique biometrics capabilities. And finally, we were awarded an $87 million increase on its current national security prime contract. Importantly, in all of our Federal solution wins, we are leveraging our artificial intelligence capabilities to enhance our solutions and create differentiated outcomes. I would now like to highlight some additional accomplishments during this quarter. We closed our acquisition of Altamira Technologies Corporation in an all-cash transaction valued at up to $375 million.
Altamira advances high-priority national security mission supporting intelligence community and Department of War customers by providing multi-intelligence technology solutions and performing critical operations. Altamira expands Parsons’ market presence in signals intelligence, missile warning, space and foreign military exploitation and adds critical customer depth with the National Air and Space Intelligence Center, National Security Agency and other classified intelligence customers. We were named one of the World’s — most Ethical Companies by Ethisphere for the 17th consecutive year, and we were honored for our project excellence on 2 major infrastructure initiatives. In Georgia, our team received the Engineering Excellence Honor Award from the American Council of Engineering Companies for the ARS Mill ramp extension in Cobb County.
Internationally, we were recognized with the Refurbishment and Retrofit Project of the Year at the Big Project Middle East Awards for our work on the King of Dolo Financial District residential uplift project. Looking forward, we are optimistic about Parsons’ future. The synergies between our Critical Infrastructure and Federal Solutions segments across 6 growing, profitable and enduring end markets set us apart and create significant opportunities for us to meet or exceed our financial goals. In Critical Infrastructure, we continue to see strong demand in both North America and the Middle East. Our focus on hard infrastructure, roads and highways, bridges, airports, rail and transit and intelligent transportation systems is aligned with the spending priorities in these geographies.
Also, there’s a need for urban development, support to major events and advanced manufacturing that match our core competencies. Our #1 ranked program management, #3 ranked construction management and AI-enabled solutions underpin our success. While we continue to monitor geopolitical developments, including the ongoing war in Iran, our momentum and our customers’ commitments to advancing their projects forward give us confidence in continued growth. Although our business has not been affected by the conflict to date, our customers remain focused on ensuring their budgets are aligned with the right priorities and their programs are properly phased. Across the Middle East, the emphasis on diversifying economies, hosting major global events and addressing defense, security and infrastructure requirements is expected to continue driving demand for our expertise.
Turning to Federal Solutions. We are encouraged by the momentum in the United States defense spending. In fiscal year 2026, $1 trillion has been appropriated for defense, and we’re beginning to see funds flow from both the base budget and reconciliation industry. For fiscal year 2027, the administration has submitted a $1.5 trillion defense budget comprising a $1.15 trillion base and $350 billion of reconciliation funding. This proposed 44% increase over current funding levels, which is focused on modernization, would represent the largest defense budget in history. The fiscal year ’27 budget presents substantial opportunities for Parsons that are closely aligned with our strengths, including missile defense, cyber, space, counter unmanned aerial systems, electronic warfare, facilities modernization, critical minerals, countering weapons and mass destruction and joint all-domain command and control.
Our purpose-built Federal Solutions portfolio is aligned with our nation’s defense and security priorities. And because of our strategic acquisitions and sustained research and development investments, we’ve built differentiated capabilities that help safeguard our nation and outpace evolving threats. We are encouraged by the strong bipartisan commitment to increasing U.S. defense spending in response to the evolving global security challenges. Our leading indicators, including our $54 billion pipeline, strong win rates of 60%, total backlog of $9.3 billion, of which 71% is funded and our $11 billion of contract wins not yet booked, give us confidence that we will continue to remain an industry growth leader, excluding the impact of our confidential contract in both segments.
We operate in 2 large and well-funded segments across 6 end markets, and our favorable financial outlook is supported by our proven execution and effective capital deployment. We are reaffirming our 2026 guidance ranges, which Matt will review shortly. In summary, we had a strong start to the year, delivering new records for adjusted EBITDA margin and total unfunded backlog, exceptional book-to-bill ratios in both segments and record first quarter cash flow. Our operational discipline, strategic contract wins and additional corporate achievements reinforce our position as an industry leader. We remain optimistic about our future and are confident in our ability to drive long-term shareholder value. With that, I’ll turn the call over to Matt to provide more details on our first quarter financial results.
Matt?
Matt Ofilos: Thank you, Carey. We’ve started 2026 with solid results and favorable forward-looking indicators towards future growth. With a strong book-to-bill in both segments, record adjusted EBITDA margins and our highest total and funded backlog to date, we are well positioned to deliver for our customers and shareholders. We continue to effectively deploy capital, investing in strategic acquisitions, internal research and development and increased share buybacks, all to support long-term growth and create shareholder value. Turning to the details of our first quarter results. Total revenue grew 8% and 3% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection, space and missile defense and transportation markets.
Highlights included strong growth on key contract drivers for the year, such as Airbase Air Defense and the FAA-TSSC5 contract. Total revenue, including the confidential contract decreased 4% from the prior year period and was down 8% on an organic basis. SG&A expenses for the first quarter increased 10% from the prior year period, primarily driven by costs related to recent acquisitions and higher transaction expenses. Record first quarter adjusted EBITDA of $151 million increased 1% from the prior year period. Adjusted EBITDA margin expanded 50 basis points to a record 10.1%. The — these increases were driven by improved execution and contributions from accretive acquisitions. I’ll turn now to our operating segments, starting first with the critical infrastructure, where first quarter revenue increased by 3% from the first quarter of 2025.
This increase was driven by organic growth of 2% and inorganic revenue contributions from our TRS and Applied Sciences acquisitions. Organic growth was primarily driven by strength in the global transportation markets. As a reminder, Middle East revenues were negatively impacted by the number of work days in Q1 given the holiday schedule compared to 2025. We expect this to resolve in Q2 where there are 3 additional workdays compared to the prior year. Critical Infrastructure adjusted EBITDA of $79 million increased 8% from the first quarter of 2025 and adjusted EBITDA margin expanded 50 basis points to 10.8%. Both adjusted EBITDA dollars and margins were first quarter records for critical infrastructure. These increases were driven by the ramp-up of recent awards, accretive acquisitions and strong program execution.
Moving to our Federal Solutions segment. Our first quarter revenue increased 12% and 4% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection space and missile defense and transportation markets. Total Federal Solutions revenue, including the confidential contract, decreased 10% from the prior year period and 17% on an organic basis. Federal Solutions adjusted EBITDA decreased 5% from the first quarter of 2025, while adjusted EBITDA margin expanded 40 basis points to 9.4%. The adjusted EBITDA dollars were primarily impacted by lower volume on the fixed-price confidential contract. The adjusted EBITDA margin increase was primarily driven by accretive contract growth and acquisitions.
Next, I’ll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q1 2026 was 72 days, a 14-day increase in the prior year period. This increase was primarily driven by lower volume on the confidential contract and timing of collections in the Middle East. During the first quarter of 2026, we used $4 million of operating cash, which was an $8 million improvement from the prior year period. Capital expenditures totaled $15 million in the first quarter of 2026. Looking ahead, we expect CapEx spend to ramp in Q2 as investments in classified facilities and upgrades to our enterprise systems accelerate Sport Parson’s long-term growth and drive greater efficiency throughout the business. Trailing 12-month free cash conversion was 102%, reflecting our disciplined focus on contract execution and collections.
Our balance sheet remains strong as we ended the first quarter with a net debt leverage ratio of 2.0x. This includes the impact of the upfront cash consideration of $330 million for the acquisition of Altamira in the quarter. During Q1, we repurchased approximately 583,000 shares for an aggregate purchase price of $35 million. Turning next to bookings. In the first quarter, we secured $2 billion in contract awards, a 17% increase year-over-year, driving a strong enterprise book-to-bill ratio of 1.4x. On a trailing 12-month basis, our book-to-bill stood at 1.1x, which extends our track record of a trailing 12-month book-to-bill of 1 floor grader for every quarter since the IPO. Both segments reported a book-to-bill ratio of 1.4x for the quarter.
Our Critical Infrastructure segment continued its impressive streak with its 22nd consecutive quarter above 1.0, with particularly outstanding performance in the Middle East, where we achieved a book-to-bill ratio of 1.5x. In Federal Solutions, contract awards increased 38% year-over-year. Our backlog at the end of the first quarter totaled $9.3 billion, a 3% increase from the prior year period. Funded backlog of $6.6 billion remains the highest since our IPO and increased 7% year-over-year. At the end of Q1, our funded backlog represented 71% of total backlog. Now let’s turn to our guidance. We are reiterating our 2026 guidance ranges provided on February 11 and based on our financial results for the first quarter of 2026 and our outlook for the remainder of the year.
These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website. On Slide 11 of our PowerPoint presentation, we also include other key assumptions in connection with our 2026 guidance, including quarterly cadences. 2026 guidance reflects the evolving budget environment, a competitive labor market and reality is of a challenging government procurement landscape. While these factors present challenges, we’re also benefiting from the tailwinds, including unprecedented global infrastructure spend, federal portfolio that’s tightly aligned with the administration’s priorities, recompete risk of less than 3% of 2026 total revenue and a record $9.3 billion in total backlog, including our highest funded backlog ever.
On top of that, we have $11 billion in awarded contracts still to be booked, which further strengthens our outlook. We’ve lowered second quarter expectations due to the timing of recent wins. However, we continue to believe strong backlog and recent awards are supportive of growth projections in the full year guidance. In summary, we delivered strong results for adjusted EBITDA margins, contract awards total unfunded backlog and our revenue was in line with expectations despite a complex global environment. We can continue to deploy capital effectively, investing in organic growth opportunities, acquisitions, share repurchases to support our growth strategy. All of this reflects our disciplined execution, and we remain confident in our ability to achieve commitments and create long-term value for our shareholders by delivering critical capabilities for our customers around the world.
With that, I’ll turn the call back over to Carey.
Carey Smith: Thank you, Matt. This quarter’s results underscore the strength and durability of the person’s portfolio with a robust pipeline, high win rates, strong book bill performance in both segments record levels of total and funded backlog and $11 billion and contract wins awarded yet to be booked, we are confident in our outlook. With that, we will now open the line for questions.
David Spille: Certainly. And our first question for today comes from the line of Sangita Jain from KeyBanc.
Sangita Jain: First of, Carey, it’s really good to hear that all your Parsons team members are safe and you had very strong 1Q results. Can you elaborate on some of the conversations you may be having with your customers about the balance between the short-term disruptions and the long-term opportunity?
Carey Smith: Certainly. Thanks, Sangita. I appreciate your question. As you mentioned, our first concern is always for the safety and security of our employees, and all 7,500 are safe and secure. Most importantly, all the employees are working on the job sites and in the offices. We really have not seen an impact to date. I will point out too, the contract has not delayed any of our funding. The Middle East exceeded their first quarter cash forecast. We have not seen any slower contract awards or positive negotiations that’s clearly reflected by our strong 1.5x book-to-bill. And we’ve not had any force majeure insurance claims. One thing that’s good about our portfolio is that no Middle East program represents more than 1.6% of our revenue, and we have 20% of Middle East backlog.
The contracts are pretty long in duration as well. The average contract duration is 4.7 years and 49% of our revenue is tied to long-term frameworks, and we’re clearly holding our full year guidance for the Middle East of 8.5% organic. What we’re seeing, Sangita, to your question is many of the GCC countries are using the periods of high oil prices to fund diversification into non-oil sectors and advanced technologies such as artificial intelligence and digital infrastructure so that they’re less vulnerable to future price swings. I do want to point out that post conflict, we believe there’s going to be significant investment in areas, including redundancy and resiliency. So not only will Parsons be doing our traditional areas of transportation, water and environment and urban development, but we’re going to expand into prioritized areas, including integrated air and missile defense, border security, counter unmanned air system, critical infrastructure protection, water security and desalination, rail, pipeline security and rebuild opportunities, and there’s also a priority to take key assets into hardened underground facilities such as data centers, treatments plants and military assets.
Just reported on the defense front, it was April 27, the Arabian Gulf business indicated that the defense spending in the Middle East is expected to rise by 20% over the next 3 years.
Sangita Jain: That’s super helpful, Carey. And maybe one for Matt. Can you talk about some of the puts and takes that went into your guidance since you’re FS margins have recovered really well and your CI margins are very strong, but you decided to keep the full year margin outlook unchanged. Can you help us walk through that?
Matt Ofilos: Yes. Thanks, Sangita. So to your point, really strong Q1 at north of 10% margin, 10.1%. CI now has 5 straight quarters, north of 10%. So the performance here has been a really strong obviously, still early in the year, 9.7% is 10 basis points this year, but on the back of 110 basis points over the last couple of years. So we’re still bullish on our margin expansion opportunities over the next couple of years. But obviously, we want to be thoughtful. It’s still early in the year. When we look at Fed, Fed is 9.4% in Q1 were high 8s, low 9s is kind of a target for us for the year. And then infrastructure, we’re 10.5% at the midpoint. So 10.8 to start the year is a little bit better than total year expectations. But obviously, early in the year, we will expect within federal, we’ll have some additional growth and cost types.
We’ve talked previously about mix is always the biggest driver to Fed margins. And then on the infrastructure side, we had a little bit lighter pass-throughs and materials in Q1. So a little bit of pressure there on margins. So again, early in the year, a great start to the year, but we’ll watch over the next couple of quarters.
David Spille: And our next question comes from the line of Sheila Kahyaoglu from Jefferies.
Sheila Kahyaoglu: Maybe Carey, can you just talk about — the Middle East seems okay. But aside from that, how do you think about the first half versus the second half growth trends? What’s really driving the upswing in the second half and some of the major program drivers there.
Carey Smith: Yes. Thank you very much, Sheila, for the question. I appreciate it. So both we anticipate both of the segments to grow within the second half of the year. What’s driving it? Let me start with federal are the new awards. We just highlighted the 4 awards, 3 of which were federal that occurred during Q1 and then the 4 awards that have already occurred after Q1 ended. So very strong start to the year for federal — also seeing significant growth on FAA. FAA, we achieved 25% growth in the first quarter, and we expect the FAA to be strong throughout the year. So I would highlight besides the awards I mentioned during the call, areas such as munitions, Holston and programs are ramping up. Also, a lot of classified work and other transaction agreements FAA and then our Missile Defense HC teams contract, which we expect to achieve over 10% growth this year as we’re supporting the important Golden Dome program.
Within the Critical Infrastructure segment, I mentioned the Riyadh metro, so we expect that to have a ramp-up in the latter half of the year. Within the North America group, we expect P3s, particularly on the East Coast to ramp up. And then we had some recent wins on the West Coast, including the LA Metro line A extension of the i70 in Missouri and the silver line in Texas, and probably a couple of other programs, I’ll highlight in the Middle East would be the Entertainment City as well as King Salmon International Airport.
Matt Ofilos: Yes. And Sheila, the only other one I would add that as we’ve talked previously about the Joint Cyber Hunt kits through ceiling tech that program is an LRIP, as you know. And so second half will transition to production and have some critical deliveries before the end of the year. So that’s also benefiting in the second half.
Sheila Kahyaoglu: Got it. And maybe to follow up, Matt, on that. You said Q2 is a little bit lower given award timing. Can you just give us a little bit more color on that? What are you seeing in the outlay environment? Why was it lower?
Matt Ofilos: Yes. So some of the awards that Carey highlighted that came in, started were kind of expected earlier in the year, call it, January, February, so we thought we’d be ramping on those. Additionally, some phasing within the Middle East. Middle East makes up about half of the reduction to Q2. So that’s really just phasing as we see the customers’ prioritizations. — again, the second half ramp on those awards is going to benefit the Middle East business. But overall, again, the reductions are really kind of just phasing and timing of awards.
Carey Smith: And it’s super exciting to see the federal momentum that we had.
David Spille: Our next question comes from the line of John Godyn from Citi.
John Godyn: Maybe we could just revisit the $1.5 trillion budget. You described it as a generational investment, well aligned with the Parson portfolio. Could you just elaborate on what’s most exciting there for you? And then sort of a quick follow-up to that. Obviously, there’s some concern about the $1.5 trillion budget going through you guys don’t have a perfect crystal ball, but any thoughts on how that may play out as we just sort of form our own views.
Carey Smith: Yes. Thanks, John. I appreciate the question. As you mentioned, it is exciting. It is a generational investment. It’s been recognized on a bipartisan basis that we’re facing with the most complex and dangerous threat environments in our nation’s history with adverse series advancing capabilities. And so the need for that budget is there. the budget is focused around 3 pillars, and I’ll kind of hit on where persons plays in each of those pillars. The first 1 is super charging Americas defense and industrial base. So while that pillar talks about shipbuilding and air power also within that pillar is a focus on critical minerals onshoring and energy independence and emerging technologies, both areas where persons place.
There probably is most important to us is the second pillar, securing America’s military advantage in the whole land. Counter unmanned air systems and economy are going to see big increases of greater than $70 billion on the top line for drug dominance and counter unmanned air systems. The specific insurance initiative is going to increase from $10 billion to $11.7 billion and $3 billion of that is aligned to infrastructure improvements. In cybersecurity, there’s going to be over $20 billion of additional funding. There’s artificial intelligence, $58.5 billion of investment in AI as well as showing all the command and control. And then there’s going to be a significant hike in both procurement and research development and technology overall, particularly in the space area, which could be more than double the 2026 enacted level.
Missile Defense is a budget priority, Missile Defense agencies to receive $17.9 billion. And then if you look at Golden Dome to receive $17 billion, that would be within the budget. The next pillar focuses on securing America’s military witness, and we play in 2 areas there. The first one is modernizing the nuclear triad. We’re involved in nuclear command control and communications — and the second area is in improving the infrastructure for our riders, which is right up our outlook. So overall, I’d say looking at a procurement increase of 85% in RD&T increase of 63% is good. As you mentioned, it’s not for certain. And I’d say, in particular, the discussion right now is over the Reconciliation Bill. Reconciliation 2.0 is moving forward, but the future is not real clear yet.
Speaker Johnson is planning on a floor boat sometime this week, which would be based on the Senators — the Senate budget resolution. But there’s a discrepancy between some of the house republican, someone add additional items that are election related and additional DHS provisions. In other words, Republicans are recommending that the skinny vote basically be passed. So I would say this week, we expect the next step on the reconciliation to see whether or not the Senate House do pass the identical reconciliations, which would move that go forward.
John Godyn: That was excellent. And if I could just ask 1 totally separate question on M&A. You guys closed 3 deals in the last 12 months and a relatively large 1 just recently — can you just refresh us on M&A pipeline thoughts from here? And how we should be thinking about the M&A strategy maybe for the next 12 or 24 months?
Carey Smith: Yes. Thanks, John. So M&A remains our #1 focus for capital deployment. As you mentioned, we closed 3 deals last year, followed by a deal, the first quarter of this year. We anticipate this year will close between 2 to 4 deals — we’ve got a strong pipeline in both federal and critical infrastructure. We continue to keep our borrower growing greater than 10% on the top line, greater than 10% EBITDA margin. We’re continuing with our strategy of preemptive as well. We like to get with companies that we know well that we’ve worked with. We have a similar mission and culture. And that way, we’re more certain for success after the integration of those assets. So you can expect to see us continue to focus of our capital on M&A.
I think it’s been a significant differentiator for the company. In fact, as I look over those — the federal wins that I cited on the script, I would say many of those are due to the fact of our revenue synergies that we’ve been able to drive across the federal business.
David Spille: And our next question comes from the line of Andrew Wittmann from Baird.
Andrew J. Wittmann: I just — Matt, I just wanted to help understand the quarter a little bit better. The holiday timing in the Middle East, how did that affect? Can you quantify the effect or estimate the effect on the growth rate in the CI segment for the quarter? And then how much of the benefit you’re going to pick up here in the second quarter. Just to understand that moving — those moving pieces a little bit more clearly.
Matt Ofilos: Yes. It was about 3 days from Q1 to Q2. So think of it as $10 million to $15 million of impact. So — we had a little bit of a headwind in Q1. A nice part for when we originally guided to first quarter for Middle East, we’re expecting flattish to down a bit. It actually came in up 2.5%. And — and so a little bit of a strong start to the year for the Middle East and some tailwinds into Q2. .
Andrew J. Wittmann: Got it. Okay. And then, Carey, on the $11 billion of awarded but unbooked, that number has been pretty steady there. Is that getting worked down? And then just going to replenish to the same level? Or is it kind of stagnant? I’m just kind of curious as to the dynamics of what’s going on in there?
Carey Smith: Yes. Great question, Andy. So what we did is we moved the FAA work, which we look for 410. So that basically moved down to way were to not book as you saw by announcements that we made or the stuff that we’ve already won post Q1, we’re going to be well over that. So that number is going to go right back up as we go into the next quarter. I think the important thing as well is to look at our book-to-bill ratios, which very strong again across the board, 1.4 for persons, 1.4 for federal and critical infrastructure and our backlog of $9.3 billion and then add to that $11 billion, and again, the $11 billion, to your point, is going to be replenished by these new awards.
Andrew J. Wittmann: Okay. And then I guess maybe just 1 final thing. Just on cash flow, Matt, your contract assets number, so your unbilled — or contract assets, cash that you’ve got or that you don’t have, that work that you performed is up a decent amount. Maybe you could just drill into that a little bit. Is this a certain types of work that you’re starting to perform in greater amounts today? Is this a geographic thing with somebody that you’re working for and have that asset it stick out with the DSOs up a little bit. Obviously, there’s a seasonal effect there. I mean just digging into some of these working capital pieces are — would be interesting to understand those dynamics. .
Matt Ofilos: Yes. Good question, Andy. So to your point, DSO was up about 14 days, which is a good number. And so overall, really happy with the cash performance in Q1. We do have a higher balances. A lot of it is related in the federal business to milestones on some of the munitions projects that it will deliver over the next 2 quarters. So I expect a number to come out over the next 2 quarters. I don’t think it will continue to expand. I think when we get into production on the Cyber Hunt kits, we may have a little bit of fluctuation, but not to the same scale. So I’d say the biggest driver has been the munitions programs and the upcoming milestones there.
David Spille: And our next question comes from the line of Gavin Parsons from UBS.
Gavin Parsons: Carey, how big is your UAS business? And are you seeing any accelerated procurement yet given Mideast learnings?
Carey Smith: Yes. So the big part of the kind of UAS, we have 2 components. One is our non-kinetic business. and that mostly goes through the Army 10 cap program. And as I mentioned, it’s deployed in the Middle East right now. The second part of it is our drone arm, which is a system of systems. And that’s basically — it’s a technology readiness level 9 that’s been deployed. It is currently deployed in Laredo on the southern border. So if I pull those 2 components out, I would guess probably $100 million-ish, if I had to make an estimate. Yes, we see growth as far as — we see future growth as far as the Middle East. So we were brought in the Middle East originally to fix another company system that was not working. So our system had basically replaced that.
And there’s ongoing demand. We also see demand within the United States. There’s a couple of procurements that were waiting on award from Department of Homeland Security and Customs and Border Protection and the Coast Guard.
Gavin Parsons: The ABD contract, I think that might also possibly fall in that category. I mean is that just Europe and Africa? Are there other geographical opportunities?
Carey Smith: Yes. That’s a great point, Gavin. I didn’t include that in the number. I just threw out, but they are based here defense contract. That’s roughly $1 billion over 5 years, and we’re on a run rate to achieve that. So air system, it’s much higher. We think air-based defense is going to continue to increase within the region as well as within Endo Paycom. Our contract within Europe has rapidly expanded. It’s currently being used for early morning for the Middle East activities.
David Spille: And our next question comes from the line of Gautam Khanna from TD Securities.
Gautam Khanna: I was wondering what’s the latest on the FAA program, that Peraton 1. I didn’t know if much work has come your way yet and what’s your latest expectation on that?
Carey Smith: Yes. So just to recap, we’ve been supporting the FAA for over 5 decades. We’ve supported them for 24 years on the technical support service contract. The FAA just issued our extension for 3 years, 1 full year early. — indicating their intent to fully use that contract. Under that contract, we provide engineering and design support, installation, integration services. We do project structure management and also technical logistics and field support. Importantly, we’ve supported about 1,000 FAA sites. So we have people pretty much everywhere embedded in the facilities and equipment work that occurs with the national aerospace system, whether it’s radars, navigation aids, communications, surveillance, automation towers.
We do the terminal radar approach control system, they’re about traffic control centers and much more. Our FAA revenue, as I mentioned, is projected to grow at 25% this year. On just the TSC contract and we were at 25% for the first quarter. We also had additional growth in on areas like voice communication switches and some contracts that we have outside the TSSE putting us at around a 35% growth rate. In addition to the legacy work that we’ve performed on the DSSC, we’re starting to perform work for the implementation of the new air traffic control system. And that work includes voice communication, automation and training systems. We’ve been working very closely with Peraton. We have an associate contractor agreement as well as with the FAA, both the FAA and Peraton when to continue to use Parsons as the implementer for that work.
Gautam Khanna: And I just wanted to also circle back to the Q2 commentary. It sounded like bookings have been pretty strong to start the quarter. What would you expect, do you have a view on what book-to-bill could be in the second quarter based on what’s in the pipeline and what you’ve already been awarded?
Matt Ofilos: Yes. To your point, Gautam, really strong start to the year. We are expecting north of 1.0 again at the Parsons level in Q2. .
Gautam Khanna: Okay. And within the segments, is there any SKU is 1 particularly strong relative to the other?
Matt Ofilos: Not really. I think they’ll both just be around 1 or better. I don’t think we’ll see another 1 another 14 necessarily, but I think they’re both in a good place to be north of 1.
Carey Smith: And again, critical infrastructure, 22 consecutive quarters greater than 10% and our trailing 12 months as a company has been over 10 since IPO.
Gautam Khanna: Great. And then you did — I mean, obviously, you touched on the Middle East business being more resilient than I think people worry about. At what point do you start to worry about this? I mean I’m just curious in terms of does it disrupt the pace of contract awards? I know you mentioned there’s a long duration to the backlog there. But I’m just curious at what point should we worry because it does seem like an overhang?
Carey Smith: Yes. Again, I would say we are not worried. The work that we’re performing there is Critical Infrastructure work. And now we’ve actually added additional defense capabilities supporting the war. Hitting on the Critical Infrastructure work for 60% of our work is in Saudi Arabia. The public investment fund just released their priority 6 ecosystems this week. So whether it’s tourism, travel and entertainment, urban development, advanced manufacturing, industrial and logistics, clean energy, Neom, we play in every single 1 of those areas. They also reiterated that they’re going to maintain all giga projects. I don’t see any cancellations. So there’s only been minor rephasing of programs, but they’ve got to get ready to be on the world stage, which can be 2030 for the Expo, 2034 for the World Cup.
And I’ll point out in Saudi Arabia. Importantly, 80% of the investment is going to be deployed within Saudi Arabia. We’ve been there for 7 decades we have a 50-50 joint venture company. So we see that as very stable. Within the UAE, we’re focused still on a lot of development work. There’s still a lot of development that has been going on. So we don’t see any slowdown there. And Qatar, our focus is primarily on 2 areas. Ashgalis our primary customer. And then we do a lot of work in the city of Blue South or which we just got the contract recompete win. So we’ve been very strong. As a result of the war, we’ve been supporting during the war effort, cyber, electronic warfare, counter unmanned air systems, air-based defense. And then we see, as I mentioned earlier, post war that we’re going to have opportunities, particularly when you look at areas like Critical Infrastructure protection, a lot of the attacks from Iran have been on data centers, water utilities.
So those assets are all going to have to be protected, potentially put underground, but definitely have critical infrastructure protection. And then there’s going to be additional rebuild. So to have a company that has a long deep history within the region, a very demonstrated proven performance as a trusted partner, We look forward to continuing to work across the Middle East and be able to help that region very quickly recover.
Operator: Our next question comes from the line of Jonathan Siegmann from Stifel.
Jonathan Siegmann: Matt and Dave, on the Cyber Hunt contract win, interesting work, and it’s new for Parsons. You mentioned it’s going to start ramping up in the second half. Can you maybe level set just how steep that ramp could be and any kind of differences in margins or capital intensity of that type of work?
Carey Smith: Yes. So I’ll start, and Matt can jump in as well. But we’re excited about the Joint Cyber Hunt Kit award. It started off as another transaction agreement over 100 companies submitted white papers. They down selected the 3 companies to build prototypes and then we were ultimately selected as the successful winner. We’ve already started the low rate initial production, and we’ll be moving into production in the fall. I will note that we’ve produced over 500 of these kits. We’re expecting another 500 to 750 as we go forward on the new contract. Another unique thing that was in our solution is — it’s the first use of a genic AI in a threat hunt kit solution, and we think that was a big discriminator in helping us win that award. It’s margin accretive. It is double-digit margins.
Matt Ofilos: Yes. So John, just to add on to Carey’s $500 million ceiling over a relatively short window, kind of 3- to 5-year contract, booked the first $250 million within the quarter. So feel really good about that work. We’ve already kind of started long lead material purchases on the production orders to kind of get ahead of schedule and help out there. I would say for second half versus first half, we’re seeing about a $50 million growth on those — on that contract, which is helping our second half, of course. And then I think from a margin perspective, this year, it’s favorable and accretive. I think we’ll see more benefit in the out years as we get further into the production and deliveries.
Jonathan Siegmann: Fantastic. And maybe one more for you, Matt. And I think your earlier comments tied to this, but just to confirm directly, remaining performance allegations for Federald Solutions was down sequentially and diverge from funded backlog. Is that just the phasing that you mentioned earlier? Or is there anything else to kind of keep in mind?
Matt Ofilos: Yes. No, exactly. It was the phasing that I mentioned and nothing else behind that.
Operator: And our next question comes from the line of Tobey Sommer from Truist Securities.
Tobey Sommer: I wanted to double click on the Middle East, again, if we could. With some of the — your customers experiencing less oil, petrochemical revenue currently. Is there — how do you look at the risk that the eventual rebuilding of that to generate revenue could proud out or elongate the projects that you are working on and pressure a little bit of revenue growth there?
Carey Smith: Yes. First, Tobey, I’d say that among sort of the 3 major investment funds, Abu Dhabi, Qatar and Saudi public investment fund, they’ve amassed over $5 trillion of wealth. So when you look at Abu Dhabi Investment Fund, they’re like the fourth largest sovereign fund in the world. The public investment fund is the fifth largest sovereign fund in the world. So they have amassed a lot of wealth over time regarding oil prices. They also have the capability both in the UAE and Saudi that they aren’t dependent on the Strait of Hormuz. They both have oil pipelines that they can continue to transport oil. The focus within the regions is very strong. There’s a Saudi Vision 2030, there’s visions in the UAE for 2030 and 2040.
There’s a national vision for Qatar for 2030. Their whole focus has been how do they diversify their dependence away from oil. So to be able to do that and achieve that, they’re still going to prioritize infrastructure investments and to be on the world stage and be present for those events. What we’re seeing, and I’ll take public investment fund strategic plan that they just published is the rephasing and moving things away from other sectors or other priorities to stay laser focused on what’s going to drive economic and social benefit to the region, and that’s where we play.
Tobey Sommer: Appreciate that. And then if I could, with respect to the Cyber Kits and that aspect of your business related to technology and sort of products, how do you envision that growing and becoming a more meaningful part of the company? And if you could dovetail your M&A strategy in coming years, with your response?
Carey Smith: Yes. Thanks. So we have a lot of products within the portfolio. Cyber Hunt Kit being one of those. We also have — I’ll just give you a few examples, assured position, navigation and timing. So if you lose your GPS signal, you can get location information. We have a product called TRx, which is an emulator product that could emulate certain signals that’s been useful in Ukraine and can also be useful in Endo Paycom and in the Middle East region. In the space side, we have a space series of products that’s called the ACs products. that are involved with a lot of the control timing of satellite vehicles we have space ground systems. We’ve delivered over 170 different ground system solutions. And then on the infrastructure side, we have the intelligent transportation system where we’re the most globally deployed system in the world today, just extending our reach now into the Middle East.
We had our first deployment there. And we’ve won some real big statewide procurements recently, including Georgia. So products is definitely a focus for us. So matter products into 2 categories. We have products that you might call hardware products, and I’ll take like our Blue Fly system. It’s a search and rescue system that’s able to assist local law enforcement as well as customs and border protection. But the secret sauce within there is really the digital signal processing, and that’s an area that we focus on as a company. So our product offerings include both software as well as hardware. And I would say a lot of the companies that we have been acquiring in addition to ceiling tech, which produced the Joint Cyber Hunt Kit do have products, capacity and focus, and you can expect to see that going forward.
We think that, that helps with our differentiation as a company. We think that’s driven are very strong win rates, which have been consistent over the past 3 years, and they’re also margin accretive.
Operator: And our next question comes from the line of Mariana Perez Mora from Bank of America.
Mariana Perez Mora: So the first one is a little bit on the budget. The market is mostly concerned about now like the $1.5 trillion ask, but actually how much could actually be done in an election year. How do you think about growth? And how much is already like funded or procured, if you were to think about like a full year continuing resolution. And how are you positioned to that scenario?
Carey Smith: Yes. First, so I would say in an election year, a full year continuing resolution is probably very likely. We know how to live with continuing resolutions. We’ve lived with them for decades. The key for us is really getting these large — on the federal side, large task order awards, which we’ve just announced to that are worth $400 million over the next 3 years. Because once you have those then you don’t really fall under the CRO you need to do is deliver task orders to those. Another important thing, obviously, with our portfolio is 50% of our portfolio does not fall under the federal government. So half our business is kind of immune from that I would say the budget, we are excited about not just this upcoming budget, but to see the $150 billion of prior reconciliation dollars starting to flow, whether that’s for Golden Dome, the munitions, Pacific deterrents, the FAA modernization, that all benefits our portfolio.
We do have a record backlog as well. And out of that backlog, 71% is funded and $11 billion of awards not booked yet. So I think we’re well prepared as company run for a long time and having these large other transaction agreements and IDIQs puts us in a good spot.
Mariana Perez Mora: At. And then if I can be more specific, there is about like a month ago, the Department of State put out a request for information for the second iteration of dips diplomatic platform support services contract at to you actually benefited from that and you got the confidential contract within that main award. How do you think about that? Because when you look at like the areas they are looking at, core transportation and logistics, security with like physical and electronic security support, infrastructure, maintaining and construction and remediation. And if we think about like the the activity going on in the Middle East right now, I would have expect those volumes to pick up. How are you thinking about that contract right now? How are you thinking about like the regards to our information and your positioning towards that?
Carey Smith: Yes. Thanks, Mariana. So the DPS contract, to your point, is coming out for reprocurement again. I believe we were the #1 awarder at the very top on the last steps contract. — we are definitely planning to bid and prepare to win that contract. Within the Department of state today, the majority of our work is with diplomatic security we provide for diplomatic security, electronic security systems. We do biometrics capabilities and counter unmanned air systems. — we deploy those at over 250 embassies and conflicts to date throughout the world. And I’d say that’s kind of our ongoing continuous business. But the DIPS contract, we are going to be bidding.
Operator: Our next question comes from the line of Louie DePalma from William Blair.
Louie Dipalma: On the space front, last year, you announced a strategic partnership with Global Star — and I was wondering, do you anticipate any potential positive impacts from the proposed Amazon acquisition, perhaps you could become 1 of Amazon’s main satellite partners for defense applications across their LEO broadband and also their LEO cellular constellations that are in the process of being built out — and also related to the Globalstar partnership. Is there a potential that your technology could be embedded into drones and other unmanned platforms to provide resiliency in the various theaters right now, whether it’s the Middle East, Ukraine or the Asia Pacific.
Carey Smith: Yes. Thanks, Louie. Appreciate the question. On the second part, the answer is yes, it could be embedded into drones to be able to support. We’re excited about the acquisition of the Globalstar by Amazon, and we are starting to engage with Amazon. I don’t like to get ahead of these discussions, but I’d be happy to discuss that on future upcoming calls.
Louie Dipalma: And there’s been a lot of questions and answers on the Middle East. But are you reiterating the prior full year outlook for 8.5% growth in the region? And — has there been any change in like the long-term view? And in terms of the variables, like how important is like the price of oil in terms of the long-term picture here in the Middle East.
Carey Smith: Thanks, Louie. Yes, we are reiterating our 8.5% growth for the Middle East. Long-term view, we’re very optimistic about the Middle East. One thing we’ve done very well is, first, we’ve been positioned there are some in decades. We have gotten in at kind of ahead of need. We’re seen as their trusted partner for all their big programs. We positioned intentionally around Riyadh about 3 years ago because we knew if there ever became funding challenges, they would focus on RiyadhRio because of the Expo and because of the World Cup. So we’re involved in transportation. We’re involved in urban development. We’re involved in water and environment. Then we expanded our capabilities recently into defense and security. So we won a border wall project, and we won a project with the Ministry of Defense.
So we’ve moved into other sectors. We’ve also gotten into data centers. We’re currently involved in about 12 data center projects within the region and also artificial intelligence projects. So I think what the team has done there very well has successfully moved from our core, which is going to continue into new areas. And I believe that we’re focused on the right priorities. If you look at Saudi Arabia, 49% of their GDP is now based on non-oil. So the countries over there have been very successful in diversifying away from oil. I’m really excited about our prospects in the country. I think they’re going to only increase after the war with Iran.
Louie Dipalma: Great. And so even if priorities shift you expect to maintain your share because Parson’s ability to be versatile in terms of like perhaps shifting from a transportation project or an entertainment project to a data center project? Or what shifts do you expect to potentially take place?
Carey Smith: So I would say, again, public investment fund in Saudi just reiterated their 6 priorities. So they’re laser-focused on tourism and entertainment, urban development advanced manufacturing, industrial logistics, clean energy and Neon. We’re in all 6 of those areas. So whether it’s doing airports, the world’s art entertainment city. — participating in the World Cup and the Expo. — tourism and hospitality sector we’re in. We do a lot of urban development with the developers there. I mentioned we’re doing the data center work in country. building industrial cities. We’re performing logistics efforts. We do a lot of water work, desalination work, renewable work. So I think we’re just really well positioned where the money is going to be spent.
Operator: And our next question comes from the line of Noah Poponak from Goldman Sachs.
Noah Poponak: Matt, is it possible to quantify what’s in the full year revenue guidance — what are you assuming for organic revenue growth in Federal Solutions ex confidential and organic revenue growth at CI. And how do you expect those to split first half versus second half? .
Matt Ofilos: Yes. So federal, excluding confidential contract, organic revenue growth is 6.6%, and then CI is just north of 6 6.1%. In first half versus second half, call it, just about 4% on federal versus 9 in the second half and then infrastructure is 3-ish first half and then 9 in the second half. So that’s the ramp that we talked about earlier.
Noah Poponak: Helpful. And Matt, on the CI margin, I guess, a lot of progress there in the last 18 months. The guidance implies that slows down quite a bit through the rest of the year. Can you talk a little bit more about that? Trying to figure out if that’s truly mix and other inputs? Or if you’re sort of still living in ultra conservative mode because of the issue of that margin?
Matt Ofilos: Yes. So without a doubt, very happy with the performance of the CI margin over the past quarter, 18 months to your point. And so again, 10.5% at the midpoint is about 10 basis points above 2025. We still have these legacy contract closeouts that we’re going. So I would say there’s some thought in my mind around some flexibility for Kerry and I if we were to accelerate some of the closeouts. But generally speaking, to your point, the performance within the business is quite strong. And so we feel really good Generally, the only other thing I would add is Q1 was a little bit stronger than expected with lower pass-throughs and materials, as I mentioned before. And so there’s some natural headwinds over the next 3 quarters as we ramp on some of those newer programs. But all in all, again, just really strong performance out of Middle East and North America and some favorable trends.
Noah Poponak: Okay. And Carey, you mentioned munitions and missile support, missions work a few times on this call. Remind us what you do there and maybe how big that is? And then you also mentioned reshoring of critical minerals. What does Parsons do there?
Carey Smith: Yes. So Matt will give you the numbers on how big others in just a second. But let me hit on what we do on munitions. So we currently have projects at both Holston and Radford and we’ve been awarded 4 of those projects to it each. And what we’re doing is modernizing the facilities. When you go to these facilities, they’re old, they’re like to decades old. So we will go in, for example, and put a new incinerator system that is more modern, doesn’t have as many environmental issues. That would be a sample project. We built a great moat around this because we actually have not had competition on most of these projects. So we’re really well positioned there. The most recent win that we have was the Neom award. And that was a unique 1 because that’s with a commercial Norwegian company to stand up an energetic facility within the United States.
So when you look forward, both under the reconciliation funds that were already passed and you look forward at the next budget, there’s a big focus to redo our plans, recognizing the importance of both ammunition and munitions. And I think we’re in a really strong spot for those. And then your second question on critical minerals. So we provide — we’re a delivery partner to private clients as well as federal agencies across mining projects, industrial projects and infrastructure programs Our history in the mining and critical minerals space dates back to 2013. And it really started with the 2 mine projects I mentioned on the call, Giant and Faro mines. Those are 2 of the most complex high-risk environmental programs in North America, they’re up in Northern Canada.
So at Giant mine, for example, we’re managing the safe construction of the roaster complex stabilizing underground workings and containing about 237,000 tonnes of underground arsenic trioxide. And at Faro Mine, we leak taminated water treatment, dam safety management, landform reconstruction and Habitat. These are most multibillion-dollar projects. They’re each over $2 billion, and they range from $12 billion to $20 billion. So the expertise that we have there is very applicable to some of the critical minerals onshoring activities where they’re going to need companies that come in and they understand the technology, they understand speed to production can manage program and construction management, perform contaminated waste management, deal with indigenous communities and understand how to do the environmental work.
Matt, over to you.
Matt Ofilos: Yes. I’d say just high level, each 1 of these contribute kind of $40 million to $50 million a piece. Radford is a little bit smaller this year as it kind of scales back in terms of delivery. But all in all, really strong market that’s growing, and we’re really excited to be part of it. Obviously, it’s a high demand for the administration. And so we’re happy to show — use our capabilities here and and be able to grow this market.
Carey Smith: And each of the 5 projects I mentioned are over $100 million in revenue.
Matt Ofilos: Over the period, it’s about $40 million to $50 million per year.
Operator: And our final question for today comes from the line as a follow-up from Jonathan Siegmann from Stifel.
Jonathan Siegmann: Just back on some of these products. The IronClad controller that you guys offer, can you just sketch out the opportunity for that product? And is that something that might have been used on some of the drones that were deployed in Epic Fury or maybe partnered with some of the drone dominance programs.
Carey Smith: Yes. The name is not bringing a bell with me, John. I’ll have to get back to you on that one.
Operator: This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to David Spille for any further remarks.
David Spille: Thank you all for joining us this morning. If you have any additional questions, please feel free to contact me directly. We look forward to connecting with many of you over the coming weeks. And with that, end of today’s call. Have a great day.
Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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