Parsons Corporation

Good day, and thank you for standing by. Welcome to the Parsons Corporation second quarter 2021 earnings conference call. At this time, all participants are in listening 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker. Dave Spilly, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our second quarter 2021 financial results. Please note that we provide the presentation slides on the Investor Relations section of our website. On the call with me today are Carrie Smith, President and CEO, and George Ball, CFO. Today, Carrie will discuss her corporate strategy and operational highlights, and then George will provide an overview of our second quarter financial results and revised 2021 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 forelooking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year end of December 31, 2020 and other SEC filings. Please refer to our earnings press release for Parsons' complete forelooking statement disclosure. We do not undertake any obligation to update forelooking statements. Management will also make reference to non-GAAP financial measures during this call, and we remind you that these non-GAAP financial measures are not a substitute for the comparable GAAP measures. I now will turn the call over to Carrie.

Thank you, Dave. I want to welcome everyone to Person's second quarter 2021 earnings call. At the outset, let me say how excited I am to be in the role of Person's CEO. It's an honor and privilege to lead a business that has two complementary segments with increasing demand. We're in all the right markets with all the right capabilities across both our critical infrastructure and federal solutions segments. I also want to take this opportunity to again thank our Executive Chairman, Chuck Harrington, for his leadership as our CEO for the past 13 years. Given my new role as the CEO of Parsons, I thought it would be helpful to start with my assessment of the business, as well as some thoughts on what's going well in areas we are focused on improving. As you will hear throughout today's call, our immediate priorities are to deliver our customers' critical missions, drive organic growth, and complete legacy critical infrastructure programs. In Federal Solutions, we are well positioned in attractive, high-growth markets where our capabilities are closely aligned to our customers' highest national security priorities. We have a long and successful M&A track record that's enabled large prime contract wins. We offer differentiated, technology-rich solutions focused on near-peer threats. And as a result, we continue to win new work, which together with our existing base, provides a solid foundation for growth. That said, we have experienced procurement and funding delays, and we face a competitive hiring environment. As I will discuss this morning, our executive leadership team is focused on addressing these issues. Moving to critical infrastructure, world renowned design firm for projects across multiple disciplines, including bridges, dams, roads and highways, smart cities, airports and rail and transit. We have truly differentiated capabilities in environmental remediation, including water and wastewater treatment, mine reclamation, and the elimination of emerging contaminants. We also offer unique cyber resiliency capabilities, which can be coupled with our design expertise to drive critical infrastructure protection, placing us at the intersection of infrastructure and technology. We continue to see increased infrastructure demand throughout the United States, Canada, and the Middle East, even without an infrastructure bill being in place, which would drive even more funding in the United States if enacted. Finally, oil prices have rebounded, which is helping our Middle East posture. However, we are completing legacy programs that were awarded prior to 2019. As most of you are aware, we made the strategic decision to no longer perform work in particular areas such as prime construction, and instead focus on areas such as design, and owner's engineering work. As a result, we feel the risk profile of the company has been significantly reduced going forward. With this background, I would like to discuss our second quarter performance in more detail. We achieved excellent and record second quarter cash flow of $104 million and record contract awards of $1.7 billion, but our revenue of $879 million was below our expectations. Despite strong 12-month book-to-bill ratios in both segments and key contract wins, we did not generate enough revenue to compensate for the program completions that we faced in the first half of 2021. We are working with our customers to accelerate task order funding across our major contracts, and we're diligently ramping up new contract wins. In federal solutions, our ability to drive organic growth is dependent in part on our ability to recruit and retain employees. While we've done a terrific job retaining employees once hired, the hiring environment is very competitive right now, particularly in the technical and cleared space. As part of our strategy to address this, we recently hired a new chief human resources officer with three decades of federal industry experience and a new chief communications officer also with an extensive federal background. Recruiting is our top priority, and we're reviewing our strategy to ensure we can continue to attract the talent we need to support our growth. As a result of the procurement funding delays, a competitive hiring environment, and two second quarter reserves, we are lowering our 2021 guidance. As part of the reduction in guidance, we have also changed our assumption on the ability to consolidate sales on our Edmonton program. During the quarter, we did have many significant accomplishments, starting with our record second quarter cash flow. We also achieved record awards for both persons in our federal solutions segment. We announced a key acquisition that expands our mission-focused technologies and enables us to drive information advantage against near-peer threats while exceeding our strict M&A criteria. Second quarter contract awards were also a record and increased 67% year-over-year to $1.7 billion, which equates to a book-to-bill ratio of 1.9 times. This was led by our highest ever book-to-bill ratio of 2.8 times in our federal solutions segment. Our critical infrastructure book-to-bill ratio was also solid at 1.1 times. During the second quarter, we won three significant contracts for mission-critical work that is driven by the administration's commitment to ensure national security. We were awarded the $2.2 billion Team's Next contract by the Missile Defense Agency, the largest contract award in Parsons' history. Under this contract, persons will provide engineering, analysis, and management support for the development of integrated and layered missile defense systems that defend the United States and allied forces against ballistic, hypersonic, and cruise missile threats. We booked the three-year base period worth $617 million out of the total contract value of $2.2 billion and a total period of performance of seven years. We were awarded a $618 million task order by the General Services Administration for C5ISR exercises, operations, and information services. We will support numerous mission partners, including the intelligence community, Department of Defense, and Department of State by providing real-time enhanced awareness that enables warfighter information advantage in their area of responsibility. We won this significant award by leveraging the capabilities from our Polaris Alpha, OG Systems, and QRC acquisitions and incorporating our Join All Domain capabilities to create a unique solution that adapts to the pace of the evolving threat. In the second quarter, we booked the first year base period worth approximately $90 million out of the total contract value of $618 million. We were also awarded a task order contract by Space and Missile System Center for Integrated Solutions for Situational Awareness, or ISSA. In addition to delivering operational, technical, and space domain awareness expertise, Parsons will meet critical innovation and agility goals for the ISSA effort by providing unique solutions in astrophysics, intelligence, data analytics, and multi-domain operations. This contract has a ceiling value of $185 million and was won by incorporating the capabilities and expertise from our Polaris Alpha acquisition. Under this contract, we booked $148 million in the second quarter. I am very pleased with the significant contract awards in our federal solutions business. Award activity has also remained strong in our critical infrastructure segment, with second quarter highlights including the award of a Middle East program management contract for $91 million. We continue to execute on our acquisition strategy of buying mission-focused companies with differentiated technologies. The level of activity in the M&A market remains high, and we see attractive opportunities in our core markets. During the second quarter, we announced the $203 million acquisition of Blackhorse Solutions and subsequently closed on this transaction in early July. This strategic acquisition expands persons' customer base and capabilities in next-generation military, intelligence, and space operations, specifically cyber, electronic warfare, and information dominance. Blackhorse also exceeds our M&A financial criteria with revenue growth and adjusted EBITDA margins, both exceeding 10%. Blackhorse is a company we have partnered with and has a similar mission-focused culture with a strong reputation in the market. This acquisition enhances our ability to pursue and win large joint all-domain contracts to combat near-peer threats. This quarter, we launched our CARE, or Cultivating a Responsible Enterprise Initiative, which empowers every employee to make a difference. In conjunction with this initiative, we published our 2021 Corporate Social Responsibility Report, which highlights our new ESG initiatives, including reducing absolute greenhouse gas emissions by 20% by 2025, and enhancing gender, ethnic, and racial diversity. In partnership with the Modern Military Association of America, Parsons proudly awarded the inaugural recipient of the 2021 Donna Johnson Military Spouse Scholarship to Jonathan Hagwood, an Army veteran. The Modern Military Association of America is dedicated to advancing fairness and equality for the LGBTQ military and veteran community, and we are proud to support this initiative in advancing diversity, equity, and inclusion. In summary, We generated strong free cash flow, achieved record awards, announced a significant acquisition, and maintained our balance sheet flexibility. Going forward, we have solidified our base of business with our $2.2 billion team's repeat win. In addition, we have meaningful tailwinds from the significant amount of new business we have won, contracts that are gaining momentum post-COVID and on-contract growth, We're also accelerating our recruiting and retention initiatives, and we expect to grow in the second half of this year over the first half, and this growth is expected to continue into 2022 and beyond. Our portfolio is differentiated and diversified. Our federal solutions portfolio is well aligned with the Biden administration national security priorities for cyber, C5ISR, artificial intelligence, missile defense, and space. Our critical infrastructure portfolio is consistent with the administration's transportation, environmental remediation, and water and wastewater treatment priorities and its goals of enhancing the cybersecurity and resilience for future infrastructure projects. We're excited about the future given our differentiated position and experience in these growing and enduring markets and our proven ability to win new work. With that, I'll turn the call over to George to discuss our second quarter financial highlights and 2021 guidance. George?

Thank you, Carrie. As Carrie indicated, second quarter results were highlighted by strong cash flow, robust awards, and M&A activity. Total revenue for the second quarter decreased 10% from the prior year period and was down 13%, excluding $29 million of revenue from our Brexit acquisitions. These decreases were driven by delayed procurements and funding, two contract reserves, and a competitive hiring environment. SG&A expenses were relatively flat from the second quarter of 2020. Adjusted EBITDA of $66 million represents a decrease of $25 million from last year, and adjusted EBITDA margin decreased to 7.5%. These decreases were primarily driven by the two reserves, as well as contract delays and a competitive hiring environment. I would like to address the two reserves we recorded in the second quarter. The first was a $6.9 million reserve on a federal solutions contract where we are a subcontractor and share incentive fees with the prime. The program has suffered delays beyond the control of the prime contractor and we've determined that previously recognized performance fees may now be partially impaired. The prime contractor plans to issue a request for equitable adjustment for fee recovery. This type of reserve is highly unusual in our federal portfolio. The second reserve, in the amount of $15.4 million, is associated with a legacy critical infrastructure program. Extensive discussions with the customer during the second quarter were unsuccessful in resolving issues associated with cost escalation and schedule delays, and we have submitted a claim to seek recovery for these damages. I'll turn now to our operating segments, starting first with federal solutions, where second quarter revenue decreased by $40 million, or 8% year over year. The decrease in revenue was driven by procurement and funding delays, a competitive hiring environment, and the aforementioned program reserve. This was partially offset by the $29 million of revenue from Braxton. Excluding the Braxton acquisition, revenue decreased 14%. Federal Solutions adjusted EBITDA decreased $15 million from the second quarter of 2020. and adjusted EBITDA margin decreased to 7.4 percent. These decreases were driven by the $6.9 million reserve and a $9 million incentive fee recognized in the second quarter of 2020. Moving now to our critical infrastructure segment. Second quarter revenue decreased by $61 million or 12 percent year over year. This decrease was driven by program completions and a $19.3 million impact from the reserve taken on the legacy critical infrastructure program. Critical infrastructure adjusted EBITDA decreased by $10 million year-over-year and was driven by a $15.4 million impact from the reserve taken on the legacy critical infrastructure program, partially offset by an increase in equity and earnings from unconsolidated joint ventures. As a result, our adjusted EBITDA margin decreased to 7.6 percent. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of the second quarter was 67 days compared to 69 days at the end of the second quarter of 2020 and 71 days at the end of last quarter. Our second quarter operating cash flow totaled $104 million compared to $88 million in the second quarter of 2020. This increase was driven by strong cash collections and positive changes in working capital. Capital expenditures totaled $5 million in the second quarter, compared to $10 million in the prior year period. Our balance sheet remains very strong. We ended the quarter with a net debt leverage ratio of 0.5 times, Considering the impact of the $203 million all-cash Blackhorse acquisition, our pro forma net debt as of June 30, 2021, would total $360 million. This would equate to a pro forma net debt leverage ratio of 1.1 times. During the quarter, we took advantage of positive market conditions and increased our revolving credit facility by $100 million to $650 million. with the option to increase this to $1.15 billion under certain conditions. This provides us with ample financial flexibility to continue with our growth investments. Turning to bookings for the second quarter, we reported contract awards of $1.7 billion, representing a book-to-bill ratio of 1.9 times. On a trailing 12-month basis, our book-to-bill ratio is a healthy 1.3 times with federal solutions at 1.5 and critical infrastructure at 1.1. Our backlog at the end of the second quarter totaled $8.4 billion, up 9 percent from last year, and continues to represent more than two years of annual revenue. Now let's turn to our guidance. We are updating our 2021 guidance for revenue, adjusted EBITDA, and cash flow due to procurement and funding delays a competitive hiring environment, the reserves we took in the second quarter, and a change in our assumption regarding the consolidation of our Edmonton program. For 2021, we expect revenue to be between $3.6 and $3.7 billion. Our adjusted EBITDA is expected to be between $295 and $315 million. Our cash flow from operating activities is expected to be between $195 and $215 million. From a quarterly cadence perspective, we expect sequential improvements in revenue and adjusted EBITDA in the third quarter, and then normal, slight, seasonal sequential declines in Q4. For operating cash flow, we expect the second half of the year to be heavily weighted in Q4. Other key assumptions in connection with our 2021 guidance are outlined on slide 10 in today's PowerPoint presentation. With that, I'll turn the call back to Carrie.

Thank you, George. 2021 is an important year for persons. We've won a significant amount of new business. However, we reduced our guidance for the reasons George described. For the remainder of this year, our executive leadership team is intensely focused on achieving the updated 2021 guidance by driving organic growth and successfully executing on our contracts. The good news is that we've already won a significant amount of new and repeat business. We're also driving funding to existing contracts, and we believe our retention and recruiting will improve, driven by recent strategic leadership changes and our assessment of critical human resources initiatives. Going forward, I'm very confident in the business, and I'm excited about our growth prospects. Over the past four years, we successfully pivoted to a balanced federal solutions and critical infrastructure portfolio, which proved to be timely and is expected to generate significant demand for our solutions for the foreseeable future. We are well positioned in these attractive, high-growth national security and critical infrastructure markets with differentiated technology solutions. With that, we will now open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Toby Summer with Truist Securities. Your line is open. Thank you.

If I could ask a question about sort of labor, what is your anticipated labor expense growth on sort of an apples to apples basis, understanding you could add heads that would change that and that pace of new additions would be impactful in a variable. And then could you also describe how a potential pickup in wage inflation could impact both segments? Thank you.

Sure. Thanks, Toby, for the question. Our expected growth from the first half to the second half of this year is 4%. And this is based upon what we've been able to achieve in proven historicals. So we felt very comfortable with that. As far as inflation, most of our contracts, the cost reimbursable on the federal side, we do include a wage adjustment clause. So that is reimbursed through the rates on the fixed price and the time material we don't, but we usually budget in the escalation when we bid the programs.

And have you... Is there, in the critical infrastructure, is there any different mechanism or experience that you've had historically relative to wage inflation, or is it really just based on contract type across both units?

Yeah, it's really based on contract type across both units. I will say it's much easier to recruit in the critical infrastructure segment.

Okay. And then in critical infrastructure, what's a historic frequency for reserves in situations such as this? You did mention, I think, in the prepared remarks that on the federal solution side, a reserve such as this is a relatively infrequent occurrence.

Correct. Federal Solutions, it's very infrequent. And on the Federal Solutions Reserve, the prime contractor is going to submit a request for equitable adjustment as the delays were not their responsibility. It was delays in getting a permit that was the responsibility of a third party. On the critical infrastructure side, they can be more common. We do go through, obviously, every quarter and update our reserves, assess our programs. And you need to have a triggering event to take a reserve, and we did have the triggering event this quarter.

So, how far back would we have to go in critical infrastructure to have a triggering event for a reserve that would, you know, need to be sort of quantified in a forum like this with earnings?

Female Speaker 1 George, you want to take this?

Male Speaker 2 Sure, Carrie. You know, the last event we had like this, Toby, was actually last year on a different project. It was a project on which we were a minority partner. You might recall there was a write-down taken late in 2020 that affected equity and earnings.

Robert Nussbaum- And prior to that, can you recall how far back? So, just to get a sense of the frequency.

Robert Nussbaum- And prior to that, Toby, it would be well before we went public. You might recall when we went public, we actually had a large increase related to the resolution of a legal matter. which we had taken a very conservative reserve, and we had a substantial pickup. So we've unfortunately had two since we went public. But as Kerry indicated in her prepared remarks, they all go back to prior bids before we went public. We think we do a great job managing risk, but we are working through a number of these legacy programs, and we've unfortunately had two of them result in reserves over the last year.

We put some different processes in place a couple years ago before going public that have helped that situation. First, we are very selective on what we bid and don't bid. We have bid guidelines. For example, we no longer bid prime construction work. We've shifted our focus to design engineering work and owner's engineering work. We also are selective on the type of partners that we work with. We have a list of partners that we will and we will not work with based on past proven results and experience. And we've strengthened our participation on joint venture boards, whether or not we're a manager or a minority partner. And we've strengthened the position of our chief risk officer in the organization. So I think as a result of these, we believe that we've been able to mitigate further risks.

Great. If I may speak one more in, what sort of changes are you making to improve your ability to attract talent? Is it money? Is it benefits? Is it a posture as an employer? If you could give us some examples, that would be helpful.

Sure, I'll give you a couple of examples. First, we hired a chief human resources officer. She comes with federal experience, which we feel is very important because recruiting in federal is different than recruiting in critical infrastructure, and it kind of sets the high bar. So she has three decades of experience there. She's also co-located with me in Centerville, which I believe will help. We brought in a new chief communications officer as well that will help on recruiting efforts there. We're also ensuring that we've got competitive HR programs across the board, salary benefits. We do feel that being a public company and having an ESOP is a unique benefit that we bring. We have a dual career path offering for technical folks that can go up in parallel with program management, all the way up to our chief technology officer position. And along with that, we have a technical fellows program, which we feel is innovative. We're recruiting outside the D.C., Maryland, Virginia area specifically. We set up an office down in Augusta, Georgia, that was several years ago, co-located with Army Cyber Command. We also have an office in San Antonio. We're co-located with the Air Force Cyber Command. And we're doing hiring out of the Denver area and Huntsville area as well. So it's how do we get outside of the space that's kind of difficult. We're working with our customers. What COVID showed us is that you can do a lot of development in an unclassified environment, often up to the point of about 90% on programs. So we're working with our customers to do software development in an unclassified environment. We developed a system that was called FedNet. It's a DevSecOps system that allows people to develop software virtually from anywhere that they reside. And then finally, we have a program post-COVID. We're letting people, if they want to continue to work remote, they can work remote. If they want to work hybrid, they can work hybrid. Or if they want to be back in the office, they can come back in the office, provided that their customer agrees with that. This gives people the maximum flexibility. When we did a survey, we found out that people really wanted that flexibility. I think all those initiatives will drive us to be employer of choice.

Thank you. Our next question comes from Josh Sullivan with Benchmark. Your line is open.

Hey, good morning.

Good morning.

Good morning, Josh. Just as you leverage those wage inflation features you just mentioned, how are the dollar values of the contracts? Is the government customer cognizant of the labor market? Are they adjusting budgets knowing that you're going to be seeking to raise the level of the compensation for talent?

I do believe that they are cognizant of it. Again, on the cost reimbursable, which represents roughly three-quarters of our federal work, we do get reimbursed for those rates, and we have escalation clauses. And then the fixed price work, it's really the onus is on us to make sure that we properly price in that inflation.

And then is there any way to quantify, you know, the hiring environment impact it's having on the overall headcount? You know, is there a number of open positions today versus the beginning of the year that you could provide us?

We do not share that information. What I will share with you is on the retention front, we're pleased with our retention. Once we do get people here, they stay with Parsons. And we've compared against the PwC surveys, and we are running on industry average on retention.

Got it. And then just one last one, you know, the acquisition of Blackhorse and your growth in the space vertical, you know, what's your appetite versus technology versus advisory? You know, does the labor market make technology more attractive in the M&A market at this point?

We're definitely focused on technology versus advisory. If you see the acquisitions that we've acquired, they've all been focused on integrated solutions. How do we have technology differentiation that provides integrated solutions? I'm really happy with our acquisitions, and I think what you'll see from Black Horses are further ability to win new business. If you look at the new business that we've won as a result of our acquisitions, combatant commander for $590 million. We won the C5ISR opportunity I spoke about earlier today for $618 million. More recently, we were awarded their base air defense opportunity for $953 million. All of these are a result of the acquisitions that we've been able to do. Blackhorse further enables us and particularly positions us in the join all domain arena.

Got it. Thanks for the time.

Thank you.

Our next question comes from Joe Donardi with Stifel. Your line is open.

Thanks. Good morning. Good morning. George, I wonder if you could just talk about the charge at infrastructure. How complete is the program? And then I understand you all are trying to, I guess, de-emphasize or exit construction in that line of business. But can you talk about how much of the portfolio is still in construction, either directly or indirectly with partners? Just trying to understand how much more risk exists there.

Joe Nye- Sure, Joe. I'll take the second part of that first. You know, we have probably about 10 percent of our portfolio exposed to construction activities. As Kerry remarked, we don't do prime construction. We only participate when we're doing the design, and in cases where we have design build joint venture exposure, we're basically bringing the design to those activities with trusted partners as contractors. Relative to the project on which the reserve was taken in critical infrastructure in Q2, the job is well along. Due to a variety of scope changes, you know, frankly, we would consider our original scope largely done. As I remarked in my discussion, we had actually very intense conversations with the client up through and including through the end of the second quarter. We were very hopeful that those would be productive and fruitful in resolving our differences. As I indicated, it proved to be unsuccessful, so we unfortunately had to submit a claim which was just submitted last week. So we're well along in the job. I think we've marked it by discounting that claim significantly. So we believe we have it behind us, but it'll likely evolve into, my guess is, litigation. So we'll take a protracted period to resolve, similar to the issue we had a number of years ago that we actually had a pickup shortly before the IPO. So it'll be a protracted but the job is very well along at this point.

Okay, that's helpful. And then just on the operating cash guidance, can you talk about kind of the moving parts there, obviously a pretty meaningful reduction, and if you could just elaborate on the impact that the Edmonton consolidation has on that, if anything?

Michael Heaney Certainly. You know, relative to the moving parts, you are correct. Obviously, there's an impact from the reduction in earnings guidance. There's also an impact relative to the project I described in our original plan, the Legacy Critical Infrastructure Reserve. We actually had an anticipation of receiving a milestone payment, significant milestone payment in the back half of the year. Given the fact that that will probably evolve into litigation, we've taken that out of guidance. Those are the two big headline issues. Then in addition to that, we had a favorable resolution of a legal matter, which would result in a payment of $8 million over the second half of the year. So that's a deduct from the original guidance. The impact of Edmonton is around $5 million. It's not significant.

Okay, okay, and then just on margins between the two segments, can you just update us on maybe where you think both segments get to from a margin standpoint for the year, just trying to understand kind of the impact of these two charges on go-forward margins, and do you still see getting to 10% at infrastructure next year?

Yeah, great question. So over the second half of the year, we're forecasting margins of around 9%. And that's pretty well balanced between both segments, so that'll get us into the eights for the full year. And we still do believe that we can get to 10% margins across the entire portfolio, including critical infrastructure as we move ahead.

And critical infrastructure without the reserve taken would have been at 10% this quarter.

Right. Okay. I'll turn it over to someone else and get back to you. Thank you.

Thank you. Our next question comes high on rumor with Cowan. Your line is open.

Yes, thanks so much. So, Carrie, you mentioned significant leadership changes, and you mentioned the two, the HR and the communications. Are there any other leadership changes that we should note?

We've also strengthened our government relations team. That person has been hired and is on board. And we've put our chief risk officer, as I mentioned, in charge of the program that we took the reserve on. And we're beefing up some of our operations. In addition, on the business development side, we've brought in some critical key strategic hires, particularly in space and cyber.

Okay, super. And then, you know, you had good bookings this quarter, and I think everybody has talked about delays. What are you seeing in terms of the bidding environment today? And what would we be looking for in terms of bookings and book to bill in this third quarter?

Yeah, so the bid environment is very robust. I mentioned earlier we did publicly announce our air base air defense win. as well as our satellite prototype and integration win. That one was $139 million. The first one was $953 million. Both those occurred right after the third quarter. This year, we will submit $22 billion of bids compared to $12 billion last year. Our pipeline is $33 billion. That split $18 billion in federal, $15 billion in critical infrastructure. We have 90 opportunities that are greater than 100 million. So all that to indicate I'm quite excited about the bid opportunity and pipeline.

Terrific. Thank you. And one last one, George. You took your revenue guide down, let me see here, by 250 to 350. Maybe walk us through 23 is the write-off. How big was the Edmonton in terms of revenues? And how big of the rest of that was split between FS and critical infrastructure?

Yes, certainly, Kai. So talking in terms of the midpoint, the first item I would cover off is the impact of Black Horse, which is about $40 million. So then you're dealing with a delta of 340. The one-time issues are actually 26 million. It might have been a little bit, kind of went by in my prepared remarks, but the P&L impact was $15.4 million of the critical infrastructure reserve, and it was $19. So the one-time impact is actually $26. Edmonton is only $30 million. It's not very significant. So the balance, which is nominally $285 million, is all related to volume.

And how is it split between the two segments?

60-40 federal critical infrastructure.

Thank you very much.

Thanks, Kevin.

Our next question is from Luke Parsons with Goldman Sachs. Your line is open.

Hey, good morning. Good morning, Kevin. To be honest, I don't really fully understand the revenue declines, so I just would love a little more color there, and just the context on that is basically I appreciate that, you know, issues in hiring and funding delays, but is that also on programs that you're already executing on? Is that on new ramp-up wins? Just given, you know, the business is down 13% organically in 1Q and 2Q in both segments. So are you not getting the growth you expected, which implies the core business is declining significantly? We would just love to hear your thoughts on that dynamic.

Yes, so it's basically looking at new ramp-ups and how quickly we feel that we can get the hiring on board. Some of the core business has declined. We had significant program completions that occurred this year, particularly on the critical infrastructure side of the business, that we were offsetting with new business. We've received the new business. Now we've got to get it staffed up and ramped up.

Okay, and I think the second half implies a lower number than you'd had in prior guidance. I mean, how confident are you you can actually kind of catch this up, and when do you think you catch this up, and when do you need to revisit your 2023 targets?

Yes, so 2021, the second half, we're confident that we will achieve those numbers. We've got quite a bit of momentum. Our CEOS win is starting to ramp up. We received the SPY Award, which will add about an additional 50 folks this year. Hidalgo is ramping up even further. We won that last year. It was a $300 million Intel win. FAA program has restored to pre-COVID growth. The Vehicle Inspection and Compliance Program has restored to pre-COVID growth. The Middle East, I talked about a $91 million program management win. That is ramping up as we speak. And Texas 183 is another program we won in critical infrastructure and giant mine. So we feel confident. And again, we have 4% growth projected over the first half without Blackhorse and the reserves.

Okay. Thanks for the detail. Last one just on book to bill. The 1.9 reported, if I calculate that on net change and backlog, it looks closer to 1.3. Did you have some de-bookings there?

Yes, we did, Gavin. Probably around $550 million in total. The largest single component of that is a hair under $200 million related to the team's contract, the incumbent contract that is concluding as we implement the recompete. Essentially, it was unexpended contract value that won't be burned before the new contract comes into play. Then in addition to that, there were a number of situations where, due to FAST approaching the end of the period of performance, and just based upon burn rates, we felt it was prudent to reduce backlog for a number of programs. And that, frankly, is a byproduct of the softness of the top line in the second quarter.

Thank you both. Thank you.

Thanks, Kevin.

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

Hi, good morning. This is actually Elizabeth on for Ron this morning.

Hi, good morning.

Good morning. Carrie, we were just wondering, you know, now that you're in your new role, how are you thinking about the business differently than your predecessor, and where do you really see your primary focus areas coming out of the gate?

Yes, so first I think Chuck and I were aligned on the strategy and where we've taken the company. I would say coming into the role where my focus is is having top positions in high-growth markets in both of our segments. Those would be markets such as cyber intelligence, C5ISR, missile defense, and smart mobility. We're going to continue to drive integrated end-to-end solutions and lead with technology differentiation. This is what has really enabled us to be able to move up the value chain and be able to win larger jobs. We're focused on what I call people first, which is having the right culture of agility, innovation, disruptiveness, and obviously very focused on improving recruiting. And then we're going to be co-located as a leadership team in Centerville.

Okay, great. Thanks. And then as you think about potential other M&A opportunities going forward, how are you thinking about what you're comfortable with the leverage ratio? And I know you mentioned that tech is going to be your focus area, but what is sort of the pipeline looking like? Do you see a lot of potential opportunities out there?

Yes, thank you. We have a significant pipeline. We're really excited about the opportunities that we're seeing. We'll continue to stay on the technology path. and the end-to-end solutions path. We've opened the aperture to federal civilian on the federal side, and we're also looking at technology-related critical infrastructure plays. But I think you continue to see us focused on areas that we have. Again, back on Blackhorse, that really differentiated us because the cyber electromagnetic conversions and information advantage is what's needed for the near-peer threats. From a leverage perspective, we would be comfortable at about 3x leverage. We're currently at 1.1 pro forma.

Great. Thanks so much. Thank you. Thank you. Our next question comes from Louie DePalmo with William Blair. Your line is open.

Good morning, Carrie, George, and Dave.

Good morning, Louie.

Carrie, you mentioned program development. completions for both the critical infrastructure and federal solutions division. In terms of the guidance reduction, how much of a factor is the revenue pressure from the program completions? And I was wondering if you could quantify the contributions from program completions from the critical infrastructure side and the federal solution side.

Yes, so the program completions were higher on the credit infrastructure side. Now it's a shorter cycle of business than what you see on the federal side, so that would be to be expected. Again, what we had hoped to do was offset that with new business, but we just haven't gotten the ramp up as quick as we liked in the hiring as quick as we'd like, so that's where our focus is.

Okay, and for the federal solutions, Division, are you able to quantify the magnitude of revenue that is churning off or has churned off and the type of revenue that has elected not to renew?

It's not really a matter of electing not to renew. As Kerry suggested, Louis, it's kind of the delta between work completing offset by work ramping up And of the 285 I mentioned previously, Kerry said about 60 percent, call it around 175, is inside of federal, about 110 inside of critical infrastructure. So it's related to the net of those two activities as it relates to guidance. To answer your question, I think you were asking about what's the relative contribution margin on that. If you look at a walk on adjusted EBITDA, it's worth about $35 million.

And I do want to highlight also that we've had very high re-compete rates, win rates, approaching about 100%.

Yeah, teams being the obvious biggest one, which really puts us in a great position from stabilizing the book.

Sounds good.

Thanks.

Going forward for 2021, we have 1.8% re-compete remaining. And if you look at 2022 and 2023, it's 5% and 6%, respectively. So we're really pleased that we've solidified our core base.

Great, thanks.

Thanks, Louie.

As a reminder, to ask a question, you will press star 1 at this time. Our next question is a follow-up from Joseph Donardi with Stifel. Your line is open.

Oh, yeah, thank you. Just following up on that last question, just so I understand, the runoff or the revenue pressure at the federal business from work that's matured, does that end in second quarter? It looks like it continues at critical infrastructure, but is the headwind at federal kind of over now, or does that continue through the year?

We have one program that will continue, and that was in our engineered systems group. It's called the Salt Waste Processing Facility. That's a program that completes in January of 2022. Okay. Okay, great.

And then, Carrie, I think last quarter, over the past couple of quarters, you all have talked about expecting to bid on, I think, $25 billion in contract value over the next year or so. Can you just update us where that number is now? You all have had a couple of pretty big awards over the past several months. Some of those have involved a number of partners, I think. So I'm just trying to understand kind of how much of that $25 billion has been awarded and how much is yet to come.

Yeah, so for the full year, we anticipate bidding $22 billion, and that's up from $12 billion last year. I think the last quarter I said it was $24 billion. We did receive the significant air defense award since then.

Okay. Okay, and then maybe just on the infrastructure side, can you just provide us with kind of conversations you're having with customers there around how they're going to handle higher infrastructure and maybe any updated thoughts in terms of, you know, what you think all that means for your business?

Yeah, so we're really excited about the infrastructure bill and the progress that was made this week in the Senate, and we're obviously closely monitoring that. The infrastructure bill would reflect $550 billion of new work. Out of that, $284 billion is in transportation areas that we play, $110 billion as roads, bridges, highways, $66 as passenger and freight rail, $40 as public transit, $42 between airports and ports, and $11 billion for safety. Those are all persons addressable markets. And then if you look at the other infrastructure in the 239, there's about 105 billion that pertains to water infrastructure and western water resiliency. And again, Parsons plays there. So we think that's a significant opportunity for us. I would highlight as well, we're not even dependent on the infrastructure bill. We're already seeing growth. Like if you look at California, They're one of 36 states that enacted a gas tax since 2010. So they've put in place a $54 billion program over 10 years. We're seeing similar growth in states like Illinois, Michigan, and Missouri. Likewise, in Canada, Canada has a significant infrastructure plan. Quebec has upgraded to $8.5 billion. And then the Middle East, as part of Saudi vision 2030, they're investing heavily, and that's an example of the program management win that we had for a new industrial city there.

So when would you expect to see additional awards kind of tied to the incremental funding that's coming from the infrastructure package?

So our estimate is six to nine months after the infrastructure package is approved is when we would start to see funds flow.

Okay. Okay. Thank you.

Thank you.

Thank you. That is all the time we have for questions today. I would now like to turn the call back to Dave Spilly 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, and with that, We'll end today's call. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.