Parsons Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Parsons Corporation earnings conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require operator assistance, please press star, then 0. I'd now like to hand the conference over to your host today, Mr. Dave Spille, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us today to discuss our second quarter of 2020 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Chuck Harrington, Chairman and CEO, George Ball, CFO, and Carey Smith, President and Chief Operating Officer. Today Chuck will discuss execution against our corporate strategy, George will provide an overview of our second quarter financial results, and then Carey will review our operational highlights. We then will close with a question and answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and anticipated future performance of the company. We caution you that such statements are not guarantees of future performance, Thank you for joining us. 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 other comparable GAAP measures. And now we'll turn the call over to Chuck.

Thank you, Dave, and good morning, and thank you to those who are joining us today for our second quarter 2020 earnings call. Since our last call, several watershed events occurred to shine a light on inclusion, diversity, and equality, which have been central to Parsons' core values for decades. These cultural tenets are essential to us as a company to ensure equality for all individuals, not only within our organization, but also in the communities we serve. Consistent with this core value, Parsons is proud to be named for the fifth consecutive year as a top 50 company for diversity by STEM Workforce Diversity Magazine. Similar to our COVID-19 response, we engage with our employees and empower them to develop solutions that will result in a more diverse workforce and inclusive culture. We approached social and cultural opportunities with the same agility and vigor that we approach our business. Now to our second quarter financial results. We reported record adjusted EBITDA and record EBITDA margins built on the strength of our growing product and solutions revenues. We also benefited from strong cash flow and a second quarter revenue that was in line with our internal expectations amidst a challenging macroeconomic backdrop. We continue to win large strategic contracts, develop technology solutions, and accelerate transactional revenues. Additionally, our strong balance sheet continues to provide us with the flexibility to strategically evaluate internal and external investments. A few details on our second quarter business results include total revenue of $979 million, which was a 1% decline from the second quarter of 2019. as we implement our strategy to run off low margin pass-through revenues combined with headwinds from COVID-19. We delivered adjusted EBITDA of $91 million and adjusted EBITDA margin of 9.3%, which is a 160 basis point improvement from the second quarter of 2019 and a 310 basis point improvement from our first quarter of 2020 results. We also generated cash flow from operating activities of $88 million. and we achieved a book-to-bill ratio of one times, which was driven by 1.2 times in critical infrastructure. Our federal solutions team continues to execute well and maintains its trailing 12-month book-to-bill ratio of 1.2 times. In the quarter, our federal solutions segment won a $950 million multiple award IDIQ contract to support advanced battle management solutions and kicked off the third quarter with a $307 million contract, one with a classified customer to provide enterprise information security services. Our critical infrastructure segment won a $224 million competitive extension to our Riyadh Metro program management contract in the quarter and continue to win new work with our connected communities market. I am pleased with the innovation our team is bringing to the market. With technology accelerating at an ever-increasing rate, We continue to innovate and develop technology to provide differentiated solutions for our customers. Our solutions are comprised of software, hardware, and services packaged in new contractual arrangements such as our intersection as a service and pandemic response offerings. As an example, our four Smart Cities Challenge winners will deploy intelligent transportation solutions leveraging our software platform that incorporates our advanced analytics, and artificial intelligence algorithms to reduce traffic congestion and improve safety and driver satisfaction. We embrace a partner-friendly strategy to bring best-degree technology solutions to market. This enables us to expand our addressable market by extending into market adjacencies and cost-selling our hardware and software products and associated services. This partnership strategy played a key role in the release of our DetectWise, GridArmor and Biosurveillance solutions. Although they are not yet material for our financial results, their margins are materially higher than our services business and momentum is building. They also are indicative of our agility, rapid prototyping capability, and our culture of innovation. In addition, they reflect our strategy to accelerate our technology and transactional revenue streams. Our strong balance sheet, low leverage, and over $500 million of undrawn revolver capacity has enabled us to make these internal investments. It also enables us to be opportunistic in pursuit of strategic acquisitions as the M&A market is now beginning to reopen and discussions are expanding. In summary, we had a successful second quarter. We reported record-adjusted EBITDA and EBITDA margins, delivered strong cash flow, and maintained a robust balance sheet. We also continued to develop innovative solutions consistent with our strategy to transition to increased hardware, software, and transactional revenue streams. I'm proud of our employees and their contributions to our inclusion, diversity, and equality core values. They continue to rise to the challenge of our quest to deliver a better world. With that, I'll turn the call over to our Chief Financial Officer, George Ball, to discuss our second quarter financial highlights. George?

Thank you, Chuck, and good morning, everyone. Today, I'll organize my remarks into the following five key areas. The income statement, cash flow results, the balance sheet, contract awards, and 2020 guidance. As Chuck indicated, we had a strong second quarter and reported revenue and profitability results that generally exceeded our internal expectations. Total revenue for the second quarter decreased 1% from the prior year due primarily to the continued runoff of pass-through revenue and COVID-19 headwinds, largely offset by growth in our federal solution segment. Organic growth was 5% when excluding approximately $67 million of contract work delayed as a result of COVID-19. Our team did an outstanding job offsetting these COVID-related delays through strong program execution, redeployment of resources to staff, additional scope on existing contracts, and ramp up work on recent wins. Indirect SDNA expenses decreased $38 million from the second quarter of 2019. This decrease was primarily lower costs related to legacy equity-based programs and a reduction in transaction-related expenses. Adjusted EBITDA of $91 million represents an increase of $15 million from last year. An adjusted EBITDA margin increased 160 basis points to 9.3%. These increases were primarily driven by higher earnings from consolidated joint ventures, strong cost controls, and approximately $6.5 million of net performance incentive fees, most of which are not expected to recur in future periods. I'll turn now to our operating segments. Starting first with Federal Solutions, where second quarter revenue grew 1% year over year. This increase was impacted by approximately $32 million of contract work that was delayed as a result of COVID-19. Excluding this impact, Federal Solutions organic revenue growth would have been 6% in the second quarter and 8% over the first half of 2020. Federal Solutions suggested EBITDA increased $12 million from the prior year quarter. and our adjusted EBITDA margin increased from 7.5% to 9.9%. These increases were driven by higher project margins resulting primarily from an increase in performance incentive fees and a decrease in subcontractor and material costs. Now a few words regarding our critical infrastructure segment. Second quarter revenue decreased 3% year over year with revenue growth at 4% when excluding approximately $35 million and a number of contract work that was delayed as a result of COVID-19. Critical infrastructure adjusted EBITDA increased 7% year over year, and our adjusted EBITDA margin increased 80 basis points to 8.7%. These increases were driven primarily by higher earnings from consolidated joint ventures and approved project margins, offset in part by lower equity and earnings from unconsolidated joint ventures. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at June 30, 2020 stands at 69 days, compared to 65 days at the end of the second quarter of 2019. Our second quarter operating cash flow totaled $88 million driven by strong collections, along with income and payroll tax deferrals totaling approximately $33 million. Capital expenditures totaled $10 million in the second quarter of 2020, which was in line with expectations. As noted by Chuck, our balance sheet remains very strong. We ended the quarter with a net debt leverage ratio of 0.4 times, and we closed the quarter with $505 million of undrawn capacity on our revolver. Regarding awards, we reported contract awards of $1 billion in the second quarter, representing a book-to-bill ratio of 1.0 times. On a trailing 12-month basis, our book-to-bill ratio is also 1.0. Our backlog at the end of the second quarter totaled $7.7 billion and continues to represent approximately two years of revenue at our current run rate. Now let's turn to our guidance. Given our strong second quarter performance and outlook for the balance of the year, we again reiterate our 2020 guidance ranges provided initially on March the 10th. With that, I'll turn the call over to our President and Chief Operating Officer, Carey Smith, to discuss our second quarter operational results.

Thank you, George. As Chuck and George indicated, we had a solid second quarter. I'm proud of our team's performance, given the fluid environment as a result of the COVID-19 pandemic. Despite these challenges, we delivered record profitability with strong cash flow and revenue results. During the second quarter, our team demonstrated agility in rapidly developing new solutions, establishing new partnerships, and deploying new offerings. across various industries during a global crisis. In addition, we took swift action to enhance our inclusion, diversity, and equality. During the second quarter, we continued to win large single and multiple award contracts, IDIQ task orders, and other transaction agreements, or OTAs. As an example, we were awarded a $224 million competitive extension as the lead joint venture partner for the Riyadh Metro Project, which is the largest ongoing metro project in the world. Other notable recent contract wins include a $307 million contract win in the third quarter with a classified customer to provide enterprise information security. In securing this large contract, we leveraged capabilities gained from OG Systems, Polaris Alpha, and Legacy Parsons. With a scope that includes information system security, information assurance engineering, security controls assessment and testing, we're strategically positioned in the growing space communication security and cryptographic engineering markets. We were also awarded the Air Force's Advanced Battle Management System $950 million Multiple Award IDIQ contract. This key contract will help enable the joint all-domain Our momentum of winning IDIQ task orders and OTA contracts continues. During the second quarter, we won an additional task order under the Air Force Research Laboratory's GARDEM IDIQ contract. We have now booked more than $110 million year-to-date under this vehicle, making us the market share leader. We also won strategic new OTA contracts, bringing our total award value to more than 100 million year-to-date on OTAs. A relevant example is our Naval Surface Technology and Innovation Consortium OTA win, where we will design, develop, build, test, and deliver a working prototype of a non-lethal system to support maritime operations. We're also pleased with CRC Technology's second quarter performance. This high-margin hardware business successfully booked wins with our survey and signals intelligence products. We also developed new use cases, leveraging our existing radio frequency situational awareness solutions for government, military, and security customers. Throughout the second quarter, we continued to drive product solutions and increase our transactional revenue. In terms of new product introductions, we've made substantial progress on our DetectWise pandemic detection and response and our grid armor solutions. DetectWise is our touchless suite of products that monitors real-time health and facilitates the safe movement of people in public areas. This solution leverages off-the-shelf sensors integrated onto a custom person's developed software background. It's been deployed to multiple locations with multiple customers, and we have a robust pipeline of over 250 opportunities. A second COVID-19 offering we introduced is our biosurveillance detect-wise dash solution. Through a partnership with a nonprofit research institute, we developed and are commercializing a diamond electrode biosensor for rapid detection of SARS-CoV-2, the virus that causes COVID-19. The sensor has passed multiple tests in a controlled laboratory environment with the live virus and detection results are nearly immediate. Use cases range from human testing to environmental, which includes airborne, surface, and water. Our newest product rollout is GridArmor, which merges information from multiple sources, such as weather, conductors, video, and vegetation, to provide real-time situational awareness for utility companies. GridArmor improves operational efficiency and enables utilities to better identify and mitigate potential catastrophic events such as wildfires and public safety power shutoffs. This is another great example of leveraging our federal technology for a critical infrastructure customer. As Chuck indicated, we've been listening to and learning from our employees regarding ideas to further enhance our inclusion, diversity, and equality efforts. Initial actions that we are implementing include posting to more diverse job boards, increasing mentoring and training opportunities, and ensuring we have a diverse candidate slate and interview panel. We will be tracking our progress every quarter against a rolling 12-month plan. Diversity is a person's core value and it's inherent in our company's culture. Finally, I would like to highlight that we received the 2020 Cogswell Outstanding Industrial Security Achievement Award. As a provider of critical national security solutions for both the intelligence community and the Department of Defense, we're very proud of this recognition. With that, I'll turn it back over to Chuck.

Thank you, Carey. In summary, our team's second quarter execution was strong. We overcame COVID-19 headwinds to deliver strong financial results, developed and solved new technology solutions, and transitioned to an effective work-from-home operational model. We further fortified our balance sheet, which we plan to utilize to execute our strategic plan with focused investments in technology products and solutions. Our team approach once again demonstrated our genuine desire to deliver a better world by reinforcing our core value of diversity, inclusion, and equality. We have a unique culture at Parsons, where our employees are the foundation of our business, built on their dedication to our customers' missions and our core values. Now, we'll open the line for questions.

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Gavin Parsons with Goldman Sachs. Your line is now open.

Hey, good morning. Good morning, Gavin. Hey, Chuck, on federal solutions growth going forward or organic growth going forward, I think you've said that could be upper single digits over the next few years and You flagged a number of key wins that will contribute to that, but your backlog is kind of flat to down over the last year and a half there. So I'm just curious, what gives you confidence in that forecast for Federal Solutions Organic?

Yeah, great question, Gavin. As we said, we have a 1.2 book to build so far through the first half of the year, and we felt it. We keep our book to bill around 1.1. That supports that double-digit growth or high single-digit growth that we talked about. We've got a lot of exciting prospects that are in the near-term award scenario that we think. In addition to those contracts, we already have one that will support that growth.

Yeah, so I mean, is there also an aspect, you know, maybe of some of these ceiling IDIQs that you haven't fully booked in there or, you know, on contract growth or something like that?

Yeah, so we have a couple of things in the DD front, and I'll have Carey provide a bit more color on this as well. But as you say, when we do book our multi-award IDIQs, we only put into backlog that amount associated with tasks that we've actually been awarded. So if we book a billion-dollar task for it and start off with a $20 million task, we're only going to put $20 million into backlog. So it's as those task orders come through. In addition to that, as you said, we've also got a couple of contracts that – where the customer is bringing in additional work, kind of consolidating two or three different suppliers worth of work into one. And those are pretty rapid ramp up, obviously. Carey, do you want to provide a little more color on the growth?

Sure, Chuck. As of the end of the second quarter, we had an awarded not book value of $220 million. Since the second quarter, obviously, we announced the $307 million win of the intelligence community contract. That was previously won in February. It was under protest, and we were just re-awarded that contract once again. We also have awaiting notice of award seven contracts that are greater than $100 million, four of which are single-award contracts, and three of those are multiple-award contracts. So we feel very confident in federal solutions growth.

That is great, Collar. Appreciate that. and then maybe just on GBSD sizing, Knox, Northrop said they expect an EMD booking in the 10 to 15 billion range. So I just wanted to see if you have any update or ability to quantify what you're expecting. Thanks.

Yeah, not at this time. Once that contract is signed and I think Northrop stated they expect that to occur perhaps even as soon as later this month, Then we'll get down into the final negotiations and scope identification for us. And so that could be something we announce later this quarter. Makes sense. Thank you.

Our next question comes from Kai Von Rumer with Palin. Your line is now open.

Yes. Thank you very much and good order. So could you give us a little bit more color on the bookings? you know usually this is this current quarter is a seasonal peak but should we look for the book to build to be kind of over one and maybe if you could kind of identify any of the particular targets you've got that are that you know would be more notable yeah so um

Again, I think you cut off a little bit there, Kai. It got a little hard for me to hear, but I know you're talking about our bookings. And so generally what we're seeing is strong proposal activity. We have a huge pipeline in federal solutions especially. I think we've submitted something like $21 billion in revenue for 2020, which is almost double what we did this time in 2019. and we also have had a real starting to ramp up quite materially on our QRC products so which is really helping the bottom line and even down. Does that answer your question, Kai?

Yes, that's helpful but I mean so with all of that I mean should we expect this should be a strong booking square? I would assume seasonally it is. I mean obviously Things may not happen. You can see delays, but it sounds like what you're saying is this should be a strong booking score. Yeah.

Q3, as you say, Ty, Q3 is usually a strong booking score as we come into the end of the year, especially in task order awards. And we've not seen a material slowdown in either prime contract or task order awards. And, Carey, any additional color you'd like to provide on that?

In addition, I mentioned earlier we had awarded not booked of $220 million at the end of the second quarter. We also have a waiting notice of award $4.8 billion, which is significant. And again, we got off to a very strong start in Q3 with the $307 million contract that we cited, as well as a very strong start and continued QRC and products momentum. As you indicate, Kai, Q3 is always strong for IDIQs and other transaction agreements. and we're at the peak we've ever had for other transaction agreements through Q2 with over 100 million awarded and expecting very strong IDIQ performance as well.

Very helpful. And then the second question would be, you know, you've talked two quarters now on detect wise. You say it's deployed broadly, you have 250 opportunities. Kind of what are we talking about in terms of revenues and when you talk about an opportunity, Is there a dollar number? Is it like a million per opportunity, 500,000? Give us some color on that, if you could, the financial potential for detect funds.

Yeah, so for competitive reasons, we're really at this point not getting down into things, so you can back calculate what the price of that unit is. And we do have various models of the DetectWise, very complex models that can link right into a customer's security or ticketing systems into less sophisticated models that are more for maybe a larger mass application. What we can say is that we've had a lot of interest in the intelligence community and the infrastructure markets and healthcare. We've got several units that are now sold. and in discussions with a lot more units that could potentially be material to our revenues and earnings by the end of the year.

Okay. Super. Thank you very much. Thank you, Kai.

Our next question comes from Joseph Gennardi with Stievel. Your line is now open.

Hey, good morning, guys. Chuck or George, you're one of the only services companies that talks about your business in terms of software as a service and transactional volume. It's clearly a strategic focus for you all. So can you just talk about that a little bit fundamentally? Why does that improve earnings power of the business longer term? Does it make you more competitive? Does it just enhance profitability? What's the advantage of being able to contract in that manner or go to market in that way? Thank you, Joseph, for the question, and good morning.

Yeah, so actually, you hit the two primary nails right on the head. One, it obviously improves our profitability tremendously. The margins in the SaaS models and these other solutions models are maturely greater than what we've historically got in the services line of our business. Secondly, it really builds upon our agility and rapid prototyping capability. At the end of the day, what our customers are looking for are solutions to problems. And there's multiple ways of getting there. They can hire a large workforce to develop a solution over time, or what we do is bring in a solution either in toto or partial, and that is much more rapidly deployable. And those solutions, as we have said in the past, have been... maybe historically got software and hardware that we've converted to COTS hardware and software to be able to package together in a total solution offering. And we see great opportunity for that both on the federal side of our business as well as our critical infrastructure side.

Chuck, are there certain customers on the government side that are more receptive to that and others that are maybe coming along?

Yeah, I think I'll put everybody in the coming along phase. But what it offers is much quicker deployment. So those customers that are interested in really rapid deployment, and you can kind of figure out who those might be, are the most interested. And we think about it, the ice was kind of broken when the intelligence community moved into cloud computing sphere where they're basically procuring a data center as a service. and so that provides kind of the priming of the pump and I think that there'll be more acquisitions in that regard probably in the intelligence community and defense department over time as these solutions are more cost effective. This way of contracting is more cost effective and more timely in the delivery of the solution.

Got it. That's helpful and if I could just sneak one more in for George just maybe on the impact from COVID in the quarter. I think Thank you. I think it's a

I actually matter of how the Parsons team has adapted. As I had in my remarks, we were effective in redeploying resources into other activities. As Carey indicated, we've had a lot of nice recent wins. We've ramped up that work. I would say we've probably seen the biggest impact, and I'm sure everybody has the same view. We anticipate that we will actually have lesser impact as we move ahead. absent a significant change in the status of the virus.

Thank you. Thank you, George. You know, and, Carey, maybe you want to provide a little color on the COVID as well.

Sure, Pat. So if you look at the COVID, I would break it into two buckets, 67 of COVID impact that was not covered under CARES, 40 million that was covered under CARES that will be reimbursed, On the 67, it was pretty much split 32 for federal, 35 for critical infrastructure. Within the federal, the major impact was our FAA program, which we're now starting to see recover. The projects are restarting up. Within the critical infrastructure sector, the main impacts were some home remediation work, which once again is starting up, as well as vehicle inspection, which has returned. and on the CARES Act coverage, we're down today half of what our peak was. We hit the peak at the end of April, early May. We're now at half of that. So what you'll expect to see is partial recovery in 2020 and with the rest of the work deferred to 2021.

Very helpful. Thank you.

Our next question comes from Louis DePalma with William Blair. Your line is now open.

Chuck, George, Carey, and David, good morning.

Good morning, Louis.

I hope everybody's doing okay.

We are, and we hope that you are as well.

Thanks. Yesterday, you were a platinum sponsor for the Space Missile Defense Virtual Conference, and in 2019, I remember you were awarded a $100 million small satellite contract with Air Force Base and Missile Systems Center for Small Satellite Integration. And I believe that program is now led by Arish, the former CEO of your OG Systems. Can you discuss at a high level how the pipeline looks for small satellite missile defense applications and how you expect that market to evolve and your role in that market?

Yeah, I'll provide an overview, and then ask Carey to provide a bit more detail. So that's our LIMSI contract, and we have an I-Bay facility we put together specifically to support that out in California where we integrate small satellites into a ring for deployment from another launch that's putting up a larger satellite, perhaps. And we can launch either before or after the primary payloads. So we've done two launches to date, and we see that pace increasing, not just from a missile defense, but from lots of potential applications as the small satellite fleet increases on a pretty rapid basis. Carey, would you like to provide a little more detail on that?

Sure. As you indicated, we were awarded the contract in early 2019. Since that time, we've had two successful launches. The contract completion runs until 2024. And our expectation is that with every primary payload mission, Space and Missile Command will also be manifesting a small satellite payload. So we will continue to be involved in all launches. It's a very robust market with future commercial potential applicability.

Sounds good. That's helpful. And also during the quarter – You announced a partnership with vehicle tolling and registration provider Neology. And I was wondering just what does that partnership entail? And do you expect that it will focus on government solutions and commercial opportunities?

Yeah, potentially, Louie. When we look at that, we see, one, a clear line of sight to smart cities applications. where we have intelligent transportation services in our intersection as a service offering. But also as we look at the smart bases of tomorrow, really those intelligent transportation solutions have the same applicability into the military bases and the offerings that we're bringing to those clients as well.

Sounds good. That's helpful. Thanks, guys.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, let's star, then one. Our next question comes from Toby Sommer with Truist. Your line is now open.

Thank you. I was wondering if you could speak to the impact of COVID-19 on your infrastructure business in terms of potentially making Thank you, Toby. I think at this point, we think it's probably too early to tell exactly what the longer-term ramifications are of the COVID pandemic.

We always think of the Yogi Berra quote, predictions are hard, especially about the future. But a couple things are for sure happening. One, the public needs to have trust reestablished that they can travel safely, whether that's by air, train, bus, car. And so there are going to be infrastructure upgrades and modifications to basically allow for more social distancing and perhaps even just physical distancing, whether it's installing plexiglass, et cetera, and technology solutions like our DetectWise product that can provide scanning, looking for symptoms, and and linking that to ticketing and other types of software applications. So software platforms are probably going to take a big tick up. We think the technology side of infrastructure will have to change. Now in terms of people's movement habits, I mean, clearly right now travel is down pretty materially. So what infrastructure customers are looking for are how do they get their work done significantly cheaper than they have done before, which is... really creates an opportunity for those companies that have technologies that can virtualize their operating centers and other types of applications. Many of these customers, unfortunately, have really old technology. So the ability to bring a SaaS model to them so they aren't having a big capital program and really improve their core technology, we think, is another near-term opportunity that we'll see out of COVID-19. Carey, is there any additional color you'd like to provide on this?

Yeah, just a couple of examples. It does provide opportunity for us. If you think about the way an airport works, for example, the future airports are not going to be like that today. So we've submitted some recent bids as far as queuing. How do you get people in and out of an airport safely? That obviously couples quite nicely with our detect-fly solution. Also, you asked earlier about the Neology Partnership. That's another terrific example of an opportunity that would be post-COVID. As most of our tooling systems go to contactless tooling, that market is very large and growing. So if you take the person's capability with intelligent transportation, coupled with Neology's innovative technology tooling solutions, we see opportunities for tool tags, tool readers, license plate recognition, vehicle detection, classification, and other areas.

Thanks. As a follow-up on the infrastructure side, if we think of potentially an infrastructure bill needing to be passed for this retooling, what kinds of items should we look for as being most direct potential drivers of your business?

I think what we've seen in the past, Toby, is is when large infrastructure bills are put forth and they really fund the advancement of technology and the betterment of infrastructure versus the terminology we saw in the past, things like shovel-ready, which tend to be more just quick action, but maybe customers haven't had enough time to really put forth the thought and planning that goes into a technology upgrade. So the technology-oriented infrastructure upgrade definitely benefits the vision of where we're going. Now, since we also have a large physical infrastructure business, we benefit that way as well. But clearly, our solutions are very differentiated on the technology side. So think of rail transit systems, as Carey pointed out, airports and aviation systems, as well as... incorporating upgrades to take into autonomous vehicles and some of the work we see going on at Tesla and other auto manufacturers.

Thanks. Last question for me. I wanted to follow up on sort of the products related to COVID-19 that you have out in the market. I understand the reluctance to identify a specific price point. Could you speak to the competitive landscape and just comment about whether this has the potential to be material. Thanks.

Thank you. So, yeah, I think the competitive landscape is blurry right now because there's a lot of first movement of existing products that probably didn't always meet the bill and then there's firms like us that are coming up with more differentiated product sets and then in some cases there's a little bit of confusion as to who's the responsible for buying products for a given market. We see a little bit of that in the infrastructure side. I think the interesting thing of the products that we're producing, which right now are dedicated to COVID, But they all have applicability to whether it's seasonal flu or other types of viruses. So they have staying power. And it goes beyond, in many cases, just measuring temperature and answering questions, cardio, pulmonary rates. I mean, we can actually, if our biosensors continue to pass the testing that we put them through, including live virus testing, Right now they're showing they can detect the COVID virus. Well, that same sensor could be used for other types of virus detection. So the materiality comes from, you know, these are not going to be large contracts. These are going to be more large numbers of product sales. So as we think about a public in the U.S. of roughly 380 million people, and if we all got tested tomorrow, we would know tomorrow whether or not we had COVID. but since so much of it has passed asymptomatically, we wouldn't know two days later if we had COVID or not. So you start thinking through how we get people back into public and how we get them back into large places, whether it's sporting events or religious worshiping areas or back into school, which is obviously a key area. We're going to need a cost-effective, rapid response to COVID testing. And you can think of it quickly that numbers of tests that are going to be done over the next 18 months are probably going to exceed hundreds of millions and hold the potential to be into the billions of tests. So it's a really, really big market. Thank you.

Our next question comes from Josh Sullivan with the Benchmark Company. Your line is now open.

Good morning, Chuck, George, Gary, Dave. Good morning, Josh. Can you just update us on how we should take the pace of the drawdown on the pass-through revenues going forward versus the organic growth and the technology program? Thanks.

Thank you, Josh. Yeah, what we had said previously is that this drawdown will continue through 2020 and 2021, and by early 2022, we should have that It's predominantly coming out of critical infrastructure, but it's also coming a bit out of our engineered systems portion of federal solutions.

Got it. Nick, can you just expand on the overall partnership approach to technology development? How are you structuring those relationships? How meaningful are they going to be going forward? How do you make sure Parsons gets the appropriate value from those relationships?

Yes, so it's a broad number of partnerships that we're looking at from licensing agreements to co-manufacturing capabilities. We have scalability and obviously getting every partner getting their fair share of the profitability is key. Carey, you might want to go into a little more detail on some of the partnerships we've put together and how we see those playing out over time.

Sure. Today we have seven global channel partners that help us sell our entire product suite worldwide. So you can think about QRC technology products. You can add in the TechWise solution as well as other product offerings like our Packet Wolf high-speed processor. We also have an additional eight channel partnerships that are currently underway. We work as well in a form of value-add resellers. So some of the partners that we have, for example, under the TechWise suite, we've established our agreements with to be able to sell their products. One key differentiator for us in that marketplace is that we're a system integrator. So we have both the domain knowledge of how our industries work, such as aviation, industrial, and healthcare, plus technology to bring along with it.

Got it. And then just one last one. Can you talk about your role on the Advanced Battle Management System for the Air Force and then how you see the timing of that program rolling forward?

Yeah.

Carey, you want to go ahead and take that?

Yes. So the Advanced Battle Management System, it's one of the first steps in the Joint All-Domain Command and Control. So that is a multiple award contract where we're expecting to bid task orders. We have a second contract that we're in the down select phase for as well that ties into JABSI, or Joint All-Domain Command and Control, which is called the Titan Program, which is going to be the ground system supporting multi-domain operations in support of the Army live fire critical missions. So we're heavily involved in all aspects of Joint All-Domain Command and Control, as well as leveraging some of our legacy product offerings, such as Command and Control Corps, into that marketplace.

Thank you for your time. Thank you.

Our next question comes from Ron Epstein with Bank of America. Your line is now open.

Good morning, guys. Good morning, Ron. A quick accounting type question. Given your spend on R&D, have you given thought to what the potential change in the R&D tax credit in 2022 could mean for your cash flow?

Yeah, I know so much of our R&D is either all or partially reimbursed. I don't know that we're going to see major impact from that. George, do you want to provide a little different color on that?

Yeah, I would agree with that, Chuck. We'd probably see some nominal benefit, Ron, but it would not be material.

Okay, it's my understanding that the customer-funded R&D is included.

Our next question comes from Justin Donati with Wells Fargo. Our line is now open.

Hi, thanks for taking my question. Can you just talk a little bit more about the margin strength this quarter, what you see as sustainable, and what was the COVID impact?

Thank you, Justin. Yeah, so as we said last quarter, our Q1 each year generally is our lowest margin quarter, and that's driven by a couple of seasonality items. One, we have higher overheads in Q1 as we're rolling out our business plan and strategy and making sure everyone's online with where we're going. but it's also a period where we generally have lower performance award fees and this particular Q1 we also had slightly higher low margin pass through revenues. Q2 is generally where we start to see the margins increase and generally have been stronger in Q3 and Q4 as well. And usually that's driven by more award fee milestones being located in Qs and so on. The other thing that generally has been occurring, I think as we've said, is over the last three or four years, the big margins and the portfolio work we're pursuing has been steadily increasing in margins. The backlog that we have is sequentially higher margin. As we book that new backlog, it's flowing through with a higher margin than backlog we booked, say, four or five years ago. So those things together kind of hit a confluence that are driving our margins up, and we continue to see those margins go up, and we expect that certainly by mid-2022, we'll have both segments operating at double-digit EBITDA margins. Does that answer your question? It does. Thank you. Thank you, Justin.

We have a follow-up question from the line up. Your line is now open.

Thanks so much. So you've basically been focused on M&A, but you said in the first quarter call, you know, you don't want to do it in a virtual environment. Where are you on that issue today? Are you looking at more things? Would you do them in a virtual environment? Give us some color on that issue.

Yes, Kai, thank you. Great question. So I think a couple of things have happened since Q1. One, we are all getting, not just Parsons, but I think all companies are getting a little more comfortable in how we can operate in a safe environment, maintaining social distancing, using masks, and disinfecting our tables and conference rooms. So one, yes, we can do a lot of this virtually, but two, we've even found ways now where we feel more comfortable going into spaces and conducting in-person due diligence. So that, combined with the fact that the stock market has gotten a little less volatile than it was there, it was obviously a little volatile there in the and I think that sellers have a little more confidence that they know where things are settling out as well as buyers have a little more confidence now where they think multiples are settling out as well. So I think it's a confluence of all those factors, Kai, that have led to a significant warming of the M&A market from our perspective.

and what sort of things are you looking at? If you can give us some color on that.

Yes, absolutely. So we're staying focused in the four key markets that we've identified that are core for us and that is cyber intelligence, space and geospatial markets, missile defense and C5ISR as well as our connected communities slash intelligent transportation systems. With that, we continue to look at companies that are leveraging and either have and augment our own core technologies or benefit from our technologies in AI, autonomous systems, cloud computing and IoT sensors and we continually look for those companies that have software and hardware IP and either they've converted quite a bit of that into either hardware software sales or as a service sales or we believe it provides us the building blocks we need to do that ourselves.

Terrific. Thank you very much.

Thank you.

Bye.

We have a follow-up question from the line of Gavin Parsons with Goldman Sachs. Your line is now open.

Hey, thanks for the follow-up. I think I might have just missed it in response to Justin's question, but the EBITDA impact from COVID in the quarter, I just wanted to see if you could put a number around that with the $67 million headwind. from delayed contract work, but then also the $40 million of reimbursed work under CARES that presumably didn't have fees. So I just wanted to see if you could quantify the EBITDA dollars that you otherwise might have recognized in the quarter. Thanks.

Yeah, so the EBITDA gets a little more difficult to calculate just because there was a lot of things that we did to counter it. I mean, it was, you know, we were making some overhead reductions, so, you know, that countered a little bit of the COVID-19 Some of our customers have, you know, allowed us obviously to go back into skiffs and so forth or work from our own skiffs. So all of that kind of, although it's fairly easy for us to attract the revenue impact, it was much more difficult for us to really quantify the EBITDA impact because of offsetting factors. So probably not the clear answer that you wanted, but I think that's just a factual reality, Gavin. Okay.

Yeah, no, that makes sense. I certainly appreciate that.

And then, George, maybe could you just give us an update on free cash flow on working cap collectibles, which you've caught up on and which are still kind of outstanding that you're working through?

Certainly, Gavin. We're generally caught up with respect to major accounts, but I would say there's pockets of slowness still across the portfolio. We obviously get a lot of questions about the Middle East. That's probably the area where we have the greatest upside opportunity as we move into the second half. But I would also tell you there are situations in both North America's critical infrastructure and federal that have upside potential. So, you know, we're probably not quite where we would be had it not been for COVID. But, you know, given the strength of the second quarter, we've obviously made a lot of progress, but bullish on the second half.

Great, and then one more quick one, if I could. Carey, any chance you have a stat offhand of how many bids in the federal solutions pipeline greater than 100 million?

Yes, we have 15 that were awarded between now and year end, and 68 in the total pipeline that are greater than 100 million. Perfect, thanks so much.

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

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.