Parsons Corporation

Good morning and welcome to the Q4 2022 Parsons Corporation Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to your host today, David Spilly. Sir, please go ahead.

Thank you very much. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2022 financial results. Please note that we provide a presentation slides on the Investor Relations section of our website. On the call with me today are Kerry Smith, Chair, President, and CEO, and Matt Ophelis, CFO. Today, Kerry will discuss our corporate strategy and operational highlights, And then Matt will provide an overview of our fourth quarter financial results and a review of our 2023 guidance. We then will close with a question and answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our 8-K filed on February 15, 2023, and the risk factors to be referenced in the 10-K for fiscal year ended December 31, 2020-22, which we'll file within the next couple days. Please refer to our earnings press release for Parson's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for the comparable GAAP measures. And now we'll turn the call over to Carrie.

Thank you, Dave. Good morning and welcome to Parsons' fourth quarter and fiscal year 2022 earnings call. We had a strong finish to 2022. achieving record revenue and adjusted EBITDA for both the fourth quarter and for the full year, while generating solid cash flow. We also delivered on our 2022 objectives, which resulted in strong, consistent, organic revenue growth throughout the year. We have a leading national security portfolio positioned to deliver solutions and outpace near-peer threats, And we are a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of heightened spend. For the fourth quarter, total revenue increased 16% year-over-year and 9% organically. This was driven by 18% growth in critical infrastructure, all of which was organic. Adjusted EBITDA grew by 8%, and cash flow from operations was $89 million for the quarter. For the full year, we exceeded $4 billion in revenue and $350 million in adjusted EBITDA for the first time in our company's history. We also delivered operating cash flow growth of 16%. We achieved organic revenue growth of 9% for the full year, driven by strong hiring and retention, on-contract growth, and our ability to win and ramp new contracts. As a result, we were one of the organic growth leaders in both of our business segments in 2022. In addition, we maintained a robust balance sheet while completing our largest acquisition since our IPO. We ended the year with a 1.4 times net leverage ratio, and Exator continues to win significant contracts and is making meaningful contributions to our results. For both the fourth quarter and for the full year, we have achieved a book to bill ratio of 1.0 times on an enterprise basis. In our critical infrastructure segment, we achieved a book to bill ratio of 1.3 times, which is the ninth consecutive quarter we exceeded 1.0 times. During the fourth quarter, we were awarded three contracts that exceeded $100 million, bringing our total to 11 contracts worth $100 million or more in 2022. Significant fourth quarter single award contract wins included a 12-year follow-on contract for environmental remediation on the giant mine program in Canada, which is one of the largest mine reclamation projects in the world. The expected value of this program to Parsons is approximately $2 billion, of which we booked $270 million in the fourth quarter. This is the third largest contract win in Parsons history. and a significant ESG accomplishment that reinforces our commitment to protecting human health and safety, restoring the environment, and maximizing socioeconomic benefits. Additionally, we were awarded a $122 million auctioneer contract for C5ISR exercises, operations, and information services by the General Services Administration. Under this contract, we booked $40 million in the fourth quarter of 2022. Parsons is pleased to support the intelligence community by providing critical global cyber and intelligence technologies. Exitor's Overseas Security Installation Services program received its second of five potential award years, valued at $119 million. On this contract, Exitor provides the Department of State with technical security installation, operation centers, and counter unmanned aerial systems worldwide. XTOR also won two task orders totaling approximately $80 million on the Integrated Base Defense Security System contract to provide the United States Air Force with a platform that seamlessly integrates computing power, communications, and tools for situational awareness. We were awarded a sole source contract with a chemicals customer to develop and implement innovative and sustainable solutions for environmental remediation, including emerging contaminants at both active and inactive manufacturing sites across North America. The contract value is $75 million over five years. In addition, we won prime positions on three multiple award IDIQ contracts, a $900 million ceiling contract with the Air Force for 10 years, to deliver systems and synthetic environmental development solutions, a $95 million ceiling value contract over five years with the Navy to provide engineering services, and a $58 million ceiling value over three years for the Toronto Transit Commission's Renewable Energy Program. And finally, after the fourth quarter of 2022 ended, we were awarded a $94 million repeat single award contract from a classified customer for cyber capabilities development and support services. We continue to build on our longstanding ESG commitment. During the fourth quarter, we received three Military Veteran Employment Awards. Additionally, in 2022, we were named one of the world's most ethical companies by Ethisphere for the 13th consecutive year, honored by the Human Rights Campaign as a 2022 Best Place to Work for the LGBTQ plus community, And we're recognized by numerous other institutions for our STEM and diversity hiring practices. As I mentioned in my opening remarks, we delivered on our objectives for 2022, which included four priorities to drive growth and profitability. Priority one was to capture new high-quality projects with increased global infrastructure spend. And we won three significant contracts in 2022. Two were giga projects to support the development of major Middle East industrial cities, and the third contract was $148 million Riyadh Metro program management contract. Domestically, we also captured funds from the infrastructure bill on federal aviation and rail and transit programs, and we expect to see increased opportunities in 2023 and beyond as additional programs are allocated funds from the Infrastructure Investment and Jobs Act. Priority two was to ramp up staffing on new business and task order wins. And I'm extremely pleased with our performance. During 2022, our ability to win new contracts, retain our repeats, grow existing contracts, increase hiring by 42%, and maintain employee retention ahead of industry benchmarks were all key contributors to our strong organic growth. Priority three was to continue to move up the solutions integration value chain. Our differentiated and complementary portfolio in federal solutions and critical infrastructure has enabled us to solve emerging customer priorities, such as PFAS, PFAS, emerging contaminant removal. Exator was a financially accretive acquisition to our top and bottom line. It brought strong capabilities in security and surveillance systems, biometrics, and counter-unmanned aerial systems. Exitor enhances our position in both the federal solutions and critical infrastructure markets. Our last goal was to make continued progress on completing remaining legacy critical infrastructure programs. During 2022, we made progress against all three projects. One project reached substantial completion, and the other two programs advanced to more than 90% and 70% complete. Although we have more work to do on these programs, I am pleased with our team's progress. Thanks to the hard work and dedication of our talented employees, 2022 was a successful year for Parsons with record revenue and profitability. We substantially increased hiring and continue to have retention rates above industry benchmarks, won a significant amount of new business. acquired an accretive company that enhanced our strategic position in both the critical infrastructure and federal solution segments, and we maintained our strong balance sheet. Looking forward to 2023, we enter the year with a strong macro environment backdrop supporting our business with an increasing defense budget, unprecedented global infrastructure spending, and continued geopolitical tensions, including cyber threats. Our 2023 priorities are to win new projects associated with increased global infrastructure funds, capture federal solutions strategic contract pursuits, expand critical infrastructure margins, and acquire creative assets. I am very excited about our future. Over the last year and a half, we made significant changes to our business by moving up the solutions integration value chain and hiring key executives. These changes enabled us to achieve record revenue and profits in 2022 and become one of the organic revenue growth leaders in both of our business segments. We are well positioned in two complementary and growing markets, and we will continue to invest in our people, technology, business development initiatives, and strategic M&A to maintain our momentum and drive shareholder value. Most importantly, we will continue to deliver on our customers' missions, which are experiencing increasing demand in both national security and critical infrastructure. With that, I will turn the call over to Matt to provide more details on our 2022 financial results and our guidance for 2023. Matt? Thank you, Carrie.

As Carrie indicated, fourth quarter and fiscal year 2020 results were highlighted by record revenue and adjusted EBITDA, as well as solid cash flow. Total revenue of $1.1 billion for the fourth quarter of 2022 increased 16% from the prior year period and was up 9% on an organic basis. Organic growth was driven primarily by the strength of our critical infrastructure operations. Our Exitor acquisition contributed approximately $67 million of revenue for the fourth quarter. Adjusted EBITDA of $98 million increased 8% from the fourth quarter of 2021 and adjusted EBITDA margin decreased 70 basis points to 8.9%. The adjusted EBITDA increase was driven primarily by Exitor and the ramp-up of new contract awards. The year-over-year margin decrease to 8.9% was driven by unfavorable indirect rate impacts, higher incentive compensation costs given the company's performance in 2022, and volume on the lower margin federal solutions program. Total revenue for the fiscal year 2022 increased 15% from the prior year and it was up 9% on an organic basis. The strong organic growth throughout the year was driven by hiring and execution in both segments. Acquisitions contributed approximately $205 million of revenue for the full year. SG&A expenses for the full year were 18.5% of total revenue compared to 20.7% in 2021 due to the efficient growth across the portfolio. Fiscal year adjusted EBITDA of $353 million increased 14% from 2021 and adjusted EBITDA margin decreased five basis points to 8.4%. The adjusted EBITDA increase was driven primarily by improved program performance and accretive acquisitions. The margin rate decrease was driven by lower equity and earnings from joint ventures. I'll turn now to our operating segments, starting first with Federal Solutions, where fourth quarter revenue increased by $69 million, or 14% from the fourth quarter of 2021. This increase was driven by organic growth of 1%, and approximately $67 million from Exitor. Organic growth was impacted by the completion of our SWPF contract and expected seasonality on specific programs. Federal Solutions adjusted EBITDA decreased $4 million, or 8%, from the fourth quarter of 2021, and adjusted EBITDA margin decreased 200 basis points to 8.5%. These decreases were driven primarily by unfavorable year-over-year indirect rate impacts higher incentive compensation, and volume on a lower margin federal solutions program. I would note that our adjusted EBITDA margin of 9% for the fiscal year 2022 was in line with plan and is representative of future annual expectations. For the full year, federal solutions revenue increased $325 million, or 17% from 2021. This increase was driven by organic growth of 6% and approximately $205 million from acquisitions. Organic growth was driven by the ramp-up of work on existing federal transportation and cyber contracts. Federal Solutions' adjusted EBITDA for the full year increased $36 million, or 22%, from 2021, and adjusted EBITDA margin increased 40 basis points from 8.6% to 9%. These increases were driven primarily by acquisitions and improved program performance. Moving now to our critical infrastructure segment. Fourth quarter revenue increased by $83 million or 18% from the fourth quarter of 2021, all of which was organic. This strong growth was driven primarily by the ramp up of hiring on new and existing contracts in the Middle East. Critical infrastructure adjusted EBITDA increased by $12 million or 30% from the fourth quarter of 2021. And adjusted EBITDA margin increased 80 basis points to 9.4%. The adjusted EBITDA increases were also driven by the ramp up of of a creative new contracts and existing contracts and improved operating performance. For the full year, critical infrastructure's revenue increased $210 million or 12% from 2021, all of which was organic. This strong growth was driven by the ramp up of new urban development, transportation, and environmental remediation contracts. Critical infrastructure's adjusted EBITDA for the full year increased by $7 million or 5% from 2021, and adjusted EBITDA margin decreased 60 basis points to 7.7%. The adjusted EBITDA increase was driven primarily by improved program performance and the ramp-up of new and existing contracts. Margins were impacted by lower equity and earnings from minority joint ventures, as previously discussed, in investments to support growth. Next, I'll discuss cash flow and balance sheet metrics. Our net BSO at the end of Q4 2022 was 69 days, up one day from the prior year period. Our fourth quarter operating cash flow totaled $89 million. Operating cash flow for the full year increased 16% to $238 million as compared to $206 million in 2021. Although we generated significant cash flow growth, we were below our expectations as a result of timing of a few international receipts. We expect receipts to recover from these delays in the first half of 2023. Capital expenditures of totaled $11 million in the fourth quarter of 2022 and $31 million for the full year. CapEx continues to be well-controlled and remains below our planned spend of less than 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of below 1.4 times. Our low leverage and undrawn borrowing capacity will enable us to continue to make internal investments and accretive acquisitions to drive additional growth. Turning to bookings for the fourth quarter. Year-over-year contract award activity increased 34% to $1.1 billion, driven by growth of 52% in federal solutions and 26% in our critical infrastructure segment. Our book-to-bill ratio for both the fourth quarter and the full year was 1.0 times. Our backlog at the end of the fourth quarter totaled $8.2 billion, in line with the third quarter of 2022, and total backlog continues to represent approximately two years of annual revenue. Now let's turn to our 2023 guidance. We've taken a measured approach in developing our 2023 guidance and are confident in our ability to achieve results within these ranges. For 2023, we expect revenue to be between $4.375 and $4.575 billion. This represents 7% growth at the midpoint of the range and 4% growth on an organic basis. Organic growth is expected to be led by critical infrastructure segment. Federal solutions revenue is also expected to grow in 2023. However, the growth is tempered by lower volume on our quadrillion contract and SWPF's completion. Our adjusted EBITDA is expected to be between $365 and $405 million, with a margin of approximately 8.6% at the midpoint of our revenue and adjusted EBITDA guidance ranges. This represents margin expansion of approximately 20 basis points from 2022. The growth in adjusted EBITDA and associated margin is expected to be driven by improved program performance and operating leverage. Our cash flow from operating activity is expected to be between $270 and $330 million. At the midpoint of the guidance range, we expect free cash flow conversion to be greater than 105% of adjusted net income. From a timing perspective, we expect Q1 revenue to be our lowest quarter of the year, but up 11% from Q1 of 2022. From Q1 onward, we expect sequential improvements through Q3 and then down sequential in Q4. We anticipate first quarter 2023 adjusted EBITDA to be up approximately 6% from Q1 of 2022. From Q1 onward, we expect sequential improvements through Q3 and then down slightly in Q4. From an operating cash flow perspective, we expect typical seasonality with negative operating cash flow in Q1 of approximately $70 million and then positive cash flow with sequential improvements throughout the year. Other key assumptions in connection with our 2023 guidance are outlined on slide 13 in today's PowerPoint presentation, located on our investor relations website. With that, I'll turn the call back over to Carrie.

Thank you, Matt. In closing, I'm very pleased with our 2022 results. We delivered on our 2022 commitments, resulting in record revenue and adjusted EBITDA, along with strong cash flow growth. Looking forward to 2023 and beyond, we will benefit from tailwinds in both our federal solutions and critical infrastructure segments, with all six of our end markets simultaneously growing. Cyber, space and missile defense, critical infrastructure protection, transportation, environmental remediation, and urban development. We have a leading national security portfolio positioned to deliver solutions that outpace near-peer threats and we're a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of heightened spend. And as a collective company, we are uniquely positioned to capitalize on areas that cross over between federal solutions and critical infrastructure. Before we begin the Q&A session, I'm pleased to announce that we will be conducting our Investor Day on March 15th at the New York Stock Exchange. This will be a great opportunity to learn more about our strategic vision hear from business unit leaders, and participate in Q&A sessions. We hope you will join us for this event. With that, we will now open the line for questions.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 in your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Bert Subban with Stifel.

Hey, good morning. Good morning. Morning, Bert. Hey, Kerry, Matt. Could you maybe help walk us through the guide in a little more detail? You know, if I look at 4Q, critical infrastructure had a super strong quarter, margins turning the corner a bit, you know, organic growth well ahead, I think, of expectations. Is there a view that that momentum slows in 23, or is this more federal solutions-driven? I know you said you expect organic growth in both, but if I look at sort of the EBITDA in 22 relative to 23 and sort of layer in the annualization of Exator and some of the growth on critical infrastructure, it would seem like maybe there's more upside. Is this sort of a conservative view, or do you have an expectation that federal solutions sort of steps back a little bit?

Yes, so we're going to continue our trend of putting together measured guidance for 2023. So we have total growth at 7%, organic growth at 4%, which is 5% for critical infrastructure, 3% for federal. We have some headwinds, I'm going to say, on the federal side of the house in terms of revenue. We have two specifically. Salt waste processing facility is $20 million, and then quadulin declining because we've reached the peak of performance is $67 million. So we'll be offsetting that from a revenue perspective. On the critical infrastructure side, obviously, we remain very strong. We're pleased, I'm going to say, also with our continued track record of competitive wins. We have a strong win percentage of 49%. We still have about $8 billion of awards that we have not put into backlogs. So those are single awards that we've won. But just because of the bookings approach we take, and a great example is Giant Mine, where we expect the program to be worth $2 billion, but it's $270 million. From a margin perspective, as we go from this year into next year on critical infrastructure, we expect to have higher equity and earnings of $8 million, which will help boost our margins there. If you look at critical infrastructure, which is where we think the most margin potential is, we're going to be focused on operating leverage and having our revenue continue to outpace our cost growth as we did this year, having continued strong program execution, the higher equity and earnings, and then we're fortunate where demand is much greater than supply in a growing infrastructure market.

And one thing, Bert, I'd add, you know, specifically for Exitor, we're expecting about $110 million of organic growth for 2023. So, you know, they had a strong wrap-up to the year, so about $110 million of inorganic for next year.

Okay, yeah, no, that's super helpful. If I think through, you know, maybe focusing on the federal solution side, I know, Carrie, you said before, you know, much more heavy exposure to RDT&E. It looks like those budgets are going to be, you know, those budgets are going to be really strong in 2023. Can you just sort of walk us through how you maybe think about your business correlating with those budgets, you know, what the opportunity set looks like, you know, whether it be on your missile defense contracts, whether it be in your cyber contracts? And then just in addition to that, is there an update on where TSSC stands? I know that was your largest recent piece.

Yes, so we are excited about the overall defense budget as well as the RDT&E budget, which is definitely going to be focused on near-peer threats. There is that we expect to continue growth or cybersecurity, both on the offensive, defensive side. We play very heavily on the convergence of cyber electronic warfare and information warfare to be able to fight a war against a nation state such as China. Base and missile defense will both continue to be high growth areas for us as well as critical infrastructure protection. Again, we're fortunate that all of our end markets are simultaneously growing and boosted by a strong defense budget as well as a strong RDT&E budget. On the repeat for the FAA contract, we anticipate an announcement likely second quarter of this year. And, again, we feel that based on our several decades of strong performance for that customer that we're highly optimistic that we will be awarded that contract.

Great. Thanks, Carrie. Thanks, Matt.

Thank you, Bert. Thanks, Bert.

Thank you. And the next question comes from Toby Summer with Truist.

Thank you.

Within the infrastructure segment, could you talk about the – the contribution to growth from Saudi and the infrastructure bill in the U.S. and how it's tracked versus your expectations so far and when you think the peak for those contributions to the company's growth and profit may be sort of out in the future?

Sure. So let me start off with... I'll start with the U.S., the infrastructure bill. We have already started to see some infrastructure bill funding. Generally, that's come through federal aviation and federal rail and transit. There's two types of infrastructure funding. There are the formula funds, which are the ones that are quickest out, and then there's grant programs, and particularly new grants, which take a little bit longer. From a planning perspective, we've assumed that we're going to see a ramp up as we approach the end of 23. and going into 2024 with a likely peak around the 26 timeframe. The nice thing on the infrastructure funds is the money is going to last a long time, and our estimate is somewhere around six to eight years in terms of long-term funding. In the Middle East, both based on the Saudi vision 2030 as well as the strong oil prices that we've experienced over the year, they were able to move many of their programs to the left. So we were awarded, as I mentioned on the call, two of the GIGA projects for the Middle East, as well as the Riyadh Metro, which is the largest metro system in the world. And we're doing some other efforts around entertainment venues and mixed-use housing. In addition to Saudi, the UAE also has a large emphasis right now on transportation and urban development. So we've seen quite a bit of growth there. That comprises today our whole Middle East business, roughly over $600 million, $650 million of annual revenue, and that will continue to grow as we move into next year. We're not yet at a peak. I would say somewhere in the next couple of years we would expect to see that peak, but we're definitely still on the incline.

Thanks, and if I could ask one federal question. if you look for in your guidance for relatively modest organic growth there, how would you sort of rank order the expected areas of contribution to that growth? You did mention cyber, offensive and defensive in some of the areas where you sit there, but how does that compare to space and other areas of focus within that segment?

yes so um thanks toby and again we do take measured guidance um so from a contribution perspective engineered systems um will be organically declining but overall growing because the extort contribution because that's where the two programs i mentioned earlier the salt waste processing facility and the quadrant reside but within engineered systems We're seeing substantial contribution in critical infrastructure protection. Exator in particular has had very strong win rates focused on electronic security systems, counter unmanned air systems, and overall base protection. Within the defense and intelligence area, we have seen growth this year on our missile defense program where we've been supporting the Missile Defense Agency for over 40 years. We're starting to see a little bit of surge effort in areas like defense of Guam and continued focus on hypersonics. I would say cyber and that kind of convergence of cyber electronic warfare, information warfare, which falls under our defense and intel, will be the fastest area of growth, though. And then we do expect to see continued growth in space, particularly around space launch, space domain awareness, and space resiliency. Thank you, Toby.

Thank you.

Thank you. And the next question comes from Josh Sullivan with the Benchmark Company.

Hey, good morning.

Good morning, Josh.

There have been a number of high-profile near-misses related to the FAA as well as some rail issues getting more attention here. Could there be any accelerated opportunities for you coming out of the infrastructure bill because of this?

So we are looking at those areas. Right now, the effort that we're focused on is technical service support, where we supply support to all their FAA sites throughout the United States. One area of big focus, to your point, is going to be how do we modernize the FAA system, and that's an area that we are looking at pursuing. So we do anticipate some future growth there. On the rail side, we implemented at the end of last year to meet the federal mandate, the positive train control program 1.0. There's an additional 2.0 focus, which is how do we capture some of the data that's coming off the systems that we've now installed and be able to do better predictability to improve safety and efficiency. So we're focused on that with our customers. And I would add a third area is going to be cybersecurity. Both of those areas are very focused on how do they make sure that they're protected against cyber threats.

And then when you look at those 11, you know, $100 million awards you've received, how much more runway is there on those large opportunities going forward?

It really varies. So if I take Faro Mine, for example, that we announced at the end of last year, that's a 20-year program. Giant Mine is a 12-year program. Some of the others are five-year programs. So it really varies by contract.

And then just one last one. What are you seeing as far as labor availability and cost? Do you see any moderation anywhere?

So we had just a little bit of wage inflation increase this year. What we're seeing is we expect that to go down somewhat as we go into 2023. I'm really pleased with both our hiring and our retention efforts, though. If you look at Q4 over Q4 from 2022 to 2021, we grew hiring by 33%. And if you look at the full year for 2022 over 2021, we grew by 42%. So I think our team's doing a fantastic job of recruiting people. And I'd say on the other side of it, we're running well below the PwC industry benchmarks for retention. So that means we're doing a terrific job, obviously, of being able to drive our organic revenue growth.

Great. Thank you.

Thank you, Josh.

Thank you. And the next question comes from Arianna Perez-Moore with Bank of America.

Good morning, everyone.

I'm going to do a follow-up question on federal solutions. I'd like to understand how you're thinking about the potential continued resolution into fiscal year 24, because I do agree fiscal year 23 is strong. The threats are not easing, but there is a political environment that could end up in a continued resolution next year. So how are you thinking about risk to that in your existing programs and also in the opportunities there?

Thanks, Mariana. Great question. On the continuing resolution, first, we have the ability to run a full year without seeing an impact due to the CR. I also mentioned earlier we have $8 billion of contract ceiling value that we haven't booked that we've been driving task orders over to, and that was a large contributor to us being able to achieve our organic growth. So we can run a long way kind of under our existing ceiling that we have in place. I'll also say it's kind of hard to speculate on the overall budget picture, but I will say persons in our overall industry, we've learned to be able to manage through this budget turbulence. We've obviously had it for decades now. And given that we have so much demand in both our national security and our critical infrastructure market areas, we can run quite a while without having any impact.

Perfect. Thank you. And then, if I may, another question on M&A. Could you mind discussing how is the environment on M&A where you see opportunities right now?

Yes, thanks. On the M&A area, we're looking at both federal solutions and critical infrastructure. We're going to keep our very high criteria, be selective in the companies that we buy, look at companies that are growing greater than 10% on the top line, have greater than 10% EBITDA margins, And most importantly, are technologically differentiated to be able to accomplish our customers' emerging missions. We have a robust pipeline and expect to continue our pace of doing at least one to two deals a year.

How is the pricing of those right now? Are transaction prices adjusting to the new interest rate environment?

Yeah, Mariana, to be honest, we haven't really seen as much of a reduction in expectations on the sell side. So we are optimistic that you'll start to see some pressure. So as Kerry mentioned, we're very diligent as we go through the process. And I will say we probably passed on a couple of deals in the last two quarters, I would say, because of higher expectations than we were interested in.

Perfect. Thank you. Thank you.

And the next question comes from Shia with Jefferies.

Thank you, and good morning, everyone. Good morning to you.

I wanted to dig into FS margins a little bit more. They dropped off in the quarter, and you mentioned salt waste and coagulant that are 60 million headwind or 80 million headwind combined. You know, what's kind of going on with profitability? Are those contracts just higher margin? Can you talk a little bit about that and your outlook for flats?

Yes, so first, overall for the year, we're very pleased with our federal margins. We came in at 9%, which is what we expected to come in. In the fourth quarter, we had some unfavorable rate impacts. A year ago, we had kind of a pickup on rates, and so if you look at the year-over-year, that basically was the main contributor there. Again, from a margin perspective, I'd say federal delivered as expected at the 9% range for the year.

Yeah, Sheila, I'd add, and Kerry kind of hit on this, but I would say throughout the year you saw we had a really strong base and managed our costs well. So kind of the downstream effect of that is in Q4 when we update billing rates, we kind of come down and it has a negative impact. So I would say the programs that are running off really don't have a substantial margin impact. SWPF was favorable. Quad is probably a little bit of a lower margin. So that coming down could be a little bit of creative for us. And so, you know, the positive side of the rate impact is, you know, while it was unfavorable for Q4, longer term, lower rates helps us from a competitive perspective and gives us some more capacity within our single award IDIQ. So not a great story for the quarter compared to last year, but all in all, really positive. And to Carrie's point, 9% for the total year was in line with our expectations.

And just when we look forward for 23, the flat guidance, you know, are there any puts and takes in that? you know, M&A as a potential contributor? Like, why is, I guess, the outlook flat, and how do we think about that?

Well, from a margin perspective, we're going up 20 basis points in 2023 over 2022. We have not assumed new M&A in there, so to your point, Sheila, that would definitely be additive, as it has been as we've done past M&A, and that M&A has largely been reflected in federal funds. Michelle, were you talking on the top line?

No, no.

No, no, all good. No, that's super helpful. And then just on CI, it was somewhat asked already, but the mid-single-digit organic growth guide, how do we think about the Middle East contribution versus other regions?

So the Middle East contribution will continue to be very strong, but I'd say we're seeing strength across the board. North America has picked up both the U.S. with the IIJA funds rollout there. as well as Canada, where they passed their bill back in 2016 and were involved in 27 of the leading 100 infrastructure programs, roughly a third within Canada. I would say it's just making sure that, again, we have measured guidance that we continue our hiring that we've been able to do and continue our retention and continue our program execution.

Great. Thank you.

Thank you.

Thank you. And once again, if you would like to ask a question, please press star, then one. And our next question comes from Kai Von Rumer with Cowan.

Hello, this is Spencer Bradsky on for Kai. Thanks for taking the question. It looks like your full year book to bill at Federal Solutions was below one in 2022. Given this, what should we expect for bookings in Federal Solutions in 2023? Thank you.

Yeah, thank you, Spencer. So we've planned for a booked a bill of 1.1 for federal in 2023. As you know, awards are very lumpy. I think what's really important is the ability to drive organic revenue, which we've been able to do at, you know, 9% for the company, 12% in critical infrastructure, 6% within federal. Continuing our strong win rates of 49%, which is very good. And then, again, we have quite a bit of bookings that you don't see reflected because our approach is to book the base year, make sure that we get up to that level of funding, then we book the follow-on option years. So a great example there is our team's contract for Missile Defense Agency. Even though the award was $2.24 billion, we've only booked $618 million. I would also, one last point too, Spencer. We were awarded two contracts right at the end of the second, right at the beginning of Q1, just missed Q4. One of them we've already announced for $94 million for an intelligence community delivering cyber solutions. The second one is a large contract also that's been negotiated, and it falls within the federal as well.

Thank you.

Thank you.

Thank you. And the next question comes from Louis de Palma with William Blair.

Kari, Matt, and Dave, good morning. You announced the large farrow mine extension. Kari, are there other large environmental remediation projects similar to the farrow and giant mine programs in your pipeline?

Yes, so we announced Faro last year and we announced Giant Mine this quarter. Both of those are very significant jobs in the billions of dollars. And again, Faro will run about 20 years and Giant will run about 12 years for us. There are other large reclamation jobs. What we're starting to see is the United States is really putting an increased focus on it. We formed some partnerships with groups such as Navajo Nations to be able to do a pipeline there. Now, having said that, the two mines in Canada are some of the largest mines in the world, so the magnitude won't be quite the same, but there are opportunities within the U.S. as well.

Great. And these contracts are very long-term in nature. In general, for environmental remediation projects that have a 10-year duration, the revenue recognition and margin structure work over the course of the contracts?

So first off, and Matt will have something to add, I'm sure, here in a minute, but first I will say on these contracts, they are continuation efforts, but we're going to see expanded scope So, for example, on Giant Mine, we expect our scope is increasing by about 66% as we move into Term 2 because the amount of work that has to be done versus Term 1. Matt, you want to talk about the REBREC?

Yeah, just on the REBREC side, it's standard, you know, cost to cost. So, it would be as the cost comes in, we'll be recognizing revenue. There's no, you know, pre-recognition or anything on any substantive part of it. On the margin side, I would say it's probably pretty flat throughout the period. The opportunity would be as they ramp up and grow, we'll get a little bit of an absorption opportunity. So there could be some growth in margin, but I don't think it'll be substantive enough to drive the overall company necessarily.

Great. And switching gears with the rising geopolitical tensions and accelerating development of counter-hypersonic missile activity, what are your general expectations for your missile defense agency work in 2023 and beyond. It seems as though there was strong funding in the defense budget. But what are your expectations, even if there's a threat of a continuing resolution or a shutdown in 2024? Thanks.

Yes, so our contract, again, has already been awarded for the $2.24 billion. Within that, we have a 40% surge clause that they can exercise at any time. There's three areas of focus for the Missile Defense Agency. One is defense of the homeland. Second one is defense of Guam. And the third one is the counter-hypersonics activity. So those are the three priorities that our team is supporting Missile Defense Agency on today.

Excellent. Thanks, Carrie. Thanks, Matt.

Thanks, Louie. Thanks, Louie.

Thank you. And that's all the time we have for questions this morning, so at this time I'd like to turn it over to David Spilly for any closing comments.

Thank you, and 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.

Thank you. The conference is now concluded. Thank you for attending today's presentation.

May now disconnect your lines.

Thank you. Bye. Thank you. Thank you. Thank you.

Good morning and welcome to the Q4 2022 Parsons Corporation Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to your host today, David Spilly. Sir, please go ahead.

Thank you very much. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2022 financial results. Please note that we provide a presentation and slides on the Investor Relations section of our website. On the call with me today are Kerry Smith, Chair, President, and CEO, and Matt Ophelis, CFO. Today, Kerry will discuss our corporate strategy and operational highlights, And then Matt will provide an overview of our fourth quarter financial results and a review of our 2023 guidance. We then will close with a question and answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our 8-K filed on February 15, 2023, and the risk factors to be referenced in the 10-K for fiscal year ended December 31, 2020-22, which we'll file within the next couple days. Please refer to our earnings press release for Parson's complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for the comparable GAAP measures. And now we'll turn the call over to Carrie.

Thank you, Dave. Good morning and welcome to Parsons' fourth quarter and fiscal year 2022 earnings call. We had a strong finish to 2022. achieving record revenue and adjusted EBITDA for both the fourth quarter and for the full year, while generating solid cash flow. We also delivered on our 2022 objectives, which resulted in strong, consistent, organic revenue growth throughout the year. We have a leading national security portfolio positioned to deliver solutions and outpace near-peer threats, And we are a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of heightened spend. For the fourth quarter, total revenue increased 16% year-over-year and 9% organically. This was driven by 18% growth in critical infrastructure, all of which was organic. Adjusted EBITDA grew by 8%, and cash flow from operations was $89 million for the quarter. For the full year, we exceeded $4 billion in revenue and $350 million in adjusted EBITDA for the first time in our company's history. We also delivered operating cash flow growth of 16%. We achieved organic revenue growth of 9% for the full year, driven by strong hiring and retention, on-contract growth, and our ability to win and ramp new contracts. As a result, we were one of the organic growth leaders in both of our business segments in 2022. In addition, we maintained a robust balance sheet while completing our largest acquisition since our IPO. We ended the year with a 1.4 times net leverage ratio, and Exator continues to win significant contracts and is making meaningful contributions to our results. For both the fourth quarter and for the full year, we have achieved a book to bill ratio of 1.0 times on an enterprise basis. In our critical infrastructure segment, we achieved a book to bill ratio of 1.3 times, which is the ninth consecutive quarter we exceeded 1.0 times. During the fourth quarter, we were awarded three contracts that exceeded $100 million, bringing our total to 11 contracts worth $100 million or more in 2022. Significant fourth quarter single award contract wins included a 12-year follow-on contract for environmental remediation on the giant mine program in Canada, which is one of the largest mine reclamation projects in the world. The expected value of this program to Parsons is approximately $2 billion, of which we booked $270 million in the fourth quarter. This is the third largest contract win in Parsons history. and a significant ESG accomplishment that reinforces our commitment to protecting human health and safety, restoring the environment, and maximizing socioeconomic benefits. Additionally, we were awarded a $122 million auction year contract for C5ISR exercises, operations, and information services by the General Services Administration. Under this contract, we booked $40 million in the fourth quarter of 2022. Parsons is pleased to support the intelligence community by providing critical global cyber and intelligence technologies. Exitor's Overseas Security Installation Services program received its second of five potential award years, valued at $119 million. On this contract, Exitor provides the Department of State with technical security installation, operation centers, and counter unmanned aerial systems worldwide. XTOR also won two task orders totaling approximately $80 million on the Integrated Base Defense Security System contract to provide the United States Air Force with a platform that seamlessly integrates computing power, communications, and tools for situational awareness. We were awarded a sole source contract with a chemicals customer to develop and implement innovative and sustainable solutions for environmental remediation, including emerging contaminants at both active and inactive manufacturing sites across North America. The contract value is $75 million over five years. In addition, we won prime positions on three multiple award IDIQ contracts, a $900 million ceiling contract with the Air Force for 10 years, to deliver systems and synthetic environmental development solutions, a $95 million ceiling value contract over five years with the Navy to provide engineering services, and a $58 million ceiling value over three years for the Toronto Transit Commission's Renewable Energy Program. And finally, after the fourth quarter of 2022 ended, we were awarded a $94 million repeat single award contract from a classified customer for cyber capabilities development and support services. We continue to build on our longstanding ESG commitment. During the fourth quarter, we received three Military Veteran Employment Awards. Additionally, in 2022, we were named one of the world's most ethical companies by Ethisphere for the 13th consecutive year, honored by the Human Rights Campaign as a 2022 Best Place to Work for the LGBTQ plus community, And we're recognized by numerous other institutions for our STEM and diversity hiring practices. As I mentioned in my opening remarks, we delivered on our objectives for 2022, which included four priorities to drive growth and profitability. Priority one was to capture new high-quality projects with increased global infrastructure spend. And we won three significant contracts in 2022. Two were giga projects to support the development of major Middle East industrial cities, and the third contract was $148 million Riyadh Metro program management contract. Domestically, we also captured funds from the infrastructure bill on federal aviation and rail and transit programs, and we expect to see increased opportunities in 2023 and beyond as additional programs are allocated funds from the Infrastructure Investment and Jobs Act. Priority two was to ramp up staffing on new business and task order wins, and I'm extremely pleased with our performance. During 2022, our ability to win new contracts, retain our repeats, grow existing contracts, increase hiring by 42%, and maintain employee retention ahead of industry benchmarks were all key contributors to our strong organic growth. Priority three was to continue to move up the solutions integration value chain. Our differentiated and complementary portfolio in federal solutions and critical infrastructure has enabled us to solve emerging customer priorities, such as PFAS, PFAS, emerging contaminant removal. Exator was a financially accretive acquisition to our top and bottom line. It brought strong capabilities in security and surveillance systems, biometrics, and counter-unmanned aerial systems. Exitor enhances our position in both the federal solutions and critical infrastructure markets. Our last goal was to make continued progress on completing remaining legacy critical infrastructure programs. During 2022, we made progress against all three projects. One project reached substantial completion, and the other two programs advanced to more than 90% and 70% complete. Although we have more work to do on these programs, I am pleased with our team's progress. Thanks to the hard work and dedication of our talented employees, 2022 was a successful year for Parsons with record revenue and profitability. We substantially increased hiring and continue to have retention rates above industry benchmarks, won a significant amount of new business, acquired an accretive company that enhanced our strategic position in both the critical infrastructure and federal solution segments, and we maintained our strong balance sheet. Looking forward to 2023, we enter the year with a strong macro environment backdrop supporting our business, with an increasing defense budget, unprecedented global infrastructure spending, and continued geopolitical tensions, including cyber threats. Our 2023 priorities are to win new projects associated with increased global infrastructure funds, capture federal solutions strategic contract pursuits, expand critical infrastructure margins, and acquire creative assets. I am very excited about our future. Over the last year and a half, we made significant changes to our business by moving up the solutions integration value chain and hiring key executives. These changes enabled us to achieve record revenue and profits in 2022 and become one of the organic revenue growth leaders in both of our business segments. We are well positioned in two complementary and growing markets, and we will continue to invest in our people, technology, business development initiatives, and strategic M&A to maintain our momentum and drive shareholder value. Most importantly, we will continue to deliver on our customers' missions, which are experiencing increasing demand in both national security and critical infrastructure. With that, I will turn the call over to Matt to provide more details on our 2022 financial results and our guidance for 2023. Matt? Thank you, Carrie.

As Carrie indicated, fourth quarter and fiscal year 2020 results were highlighted by record revenue and adjusted EBITDA, as well as solid cash flow. Total revenue of $1.1 billion for the fourth quarter of 2022 increased 16% from the prior year period and was up 9% on an organic basis. Organic growth was driven primarily by the strength of our critical infrastructure operations. Our Exitor acquisition contributed approximately $67 million of revenue for the fourth quarter. Adjusted EBITDA of $98 million increased 8% from the fourth quarter of 2021 and adjusted EBITDA margin decreased 70 basis points to 8.9%. The adjusted EBITDA increase was driven primarily by Exitor and the ramp-up of new contract awards. The year-over-year margin decrease to 8.9% was driven by unfavorable indirect rate impacts, higher incentive compensation costs given the company's performance in 2022, and volume on a lower margin federal solutions program. Total revenue for the fiscal year 2022 increased 15% from the prior year and it was up 9% on an organic basis. The strong organic growth throughout the year was driven by hiring and execution in both segments. Acquisitions contributed approximately $205 million of revenue for the full year. SG&A expenses for the full year were 18.5% of total revenue compared to 20.7% in 2021 due to the efficient growth across the portfolio. Fiscal year adjusted EBITDA of $353 million increased 14% from 2021 and adjusted EBITDA margin decreased five basis points to 8.4%. The adjusted EBITDA increase was driven primarily by improved program performance and accretive acquisitions. The margin rate decrease was driven by lower equity and earnings from joint ventures. I'll turn now to our operating segments, starting first with federal solutions, where fourth quarter revenue increased by $69 million, or 14% from the fourth quarter of 2021. This increase was driven by organic growth of 1%, and approximately $67 million from Exitor. Organic growth was impacted by the completion of our SWPF contract and expected seasonality on specific programs. Federal Solutions adjusted EBITDA decreased $4 million, or 8%, from the fourth quarter of 2021, and adjusted EBITDA margin decreased 200 basis points to 8.5%. These decreases were driven primarily by unfavorable year-over-year indirect rate impacts higher incentive compensation, and volume on a lower margin federal solutions program. I would note that our adjusted EBITDA margin of 9% for the fiscal year 2022 was in line with plan and is representative of future annual expectations. For the full year, federal solutions revenue increased $325 million, or 17% from 2021. This increase was driven by organic growth of 6% and approximately $205 million from acquisitions. Organic growth was driven by the ramp-up of work on existing federal transportation and cyber contracts. Federal Solutions' adjusted EBITDA for the full year increased $36 million, or 22%, from 2021, and adjusted EBITDA margin increased 40 basis points from 8.6% to 9%. These increases were driven primarily by acquisitions and improved program performance. Moving now to our critical infrastructure segments. Fourth quarter revenue increased by $83 million or 18% from the fourth quarter of 2021, all of which was organic. This strong growth was driven primarily by the ramp up of hiring on new and existing contracts in the Middle East. Critical infrastructure adjusted EBITDA increased by $12 million or 30% from the fourth quarter of 2021. And adjusted EBITDA margin increased 80 basis points to 9.4%. The adjusted EBITDA increases were also driven by the ramp up of of a creative new contracts and existing contracts and improved operating performance. For the full year, critical infrastructure's revenue increased $210 million or 12% from 2021, all of which was organic. This strong growth was driven by the ramp up of new urban development, transportation, and environmental remediation contracts. Critical infrastructure's adjusted EBITDA for the full year increased by $7 million or 5% from 2021, and adjusted EBITDA margin decreased 60 basis points to 7.7%. The adjusted EBITDA increase was driven primarily by improved program performance and the ramp-up of new and existing contracts. Margins were impacted by lower equity and earnings from minority joint ventures, as previously discussed, in investments to support growth. Next, I'll discuss cash flow and balance sheet metrics. Our net BSO at the end of Q4 2022 was 69 days, up one day from the prior year period. Our fourth quarter operating cash flow totaled $89 million. Operating cash flow for the full year increased 16% to $238 million as compared to $206 million in 2021. Although we generated significant cash flow growth, we were below our expectations as a result of timing of a few international receipts. We expect receipts to recover from these delays in the first half of 2023. Capital expenditures of totaled $11 million in the fourth quarter of 2022 and $31 million for the full year. CapEx continues to be well-controlled and remains below our planned spend of less than 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of below 1.4 times. Our low leverage and undrawn borrowing capacity will enable us to continue to make internal investments and accretive acquisitions to drive additional growth. Turning to bookings for the fourth quarter. Year-over-year contract award activity increased 34% to $1.1 billion, driven by growth of 52% in federal solutions and 26% in our critical infrastructure segment. Our book-to-bill ratio for both the fourth quarter and the full year was 1.0 times. Our backlog at the end of the fourth quarter totaled $8.2 billion, in line with the third quarter of 2022, and total backlog continues to represent approximately two years of annual revenue. Now let's turn to our 2023 guidance. We've taken a measured approach in developing our 2023 guidance and are confident in our ability to achieve results within these ranges. For 2023, we expect revenue to be between $4.375 and $4.575 billion. This represents 7% growth at the midpoint of the range and 4% growth on an organic basis. Organic growth is expected to be led by critical infrastructure segment. Federal solutions revenue is also expected to grow in 2023. However, the growth is tempered by lower volume on our quadrillion contract and SWPF's completion. Our adjusted EBITDA is expected to be between $365 and $405 million, with a margin of approximately 8.6% at the midpoint of our revenue and adjusted EBITDA guidance ranges. This represents margin expansion of approximately 20 basis points from 2022. The growth in adjusted EBITDA and associated margin is expected to be driven by improved program performance and operating leverage. Our cash flow from operating activity is expected to be between $270 and $330 million. At the midpoint of the guidance range, we expect free cash flow conversion to be greater than 105% of adjusted net income. From a timing perspective, we expect Q1 revenue to be our lowest quarter of the year, but up 11% from Q1 of 2022. From Q1 onward, we expect sequential improvements through Q3 and then down sequential in Q4. We anticipate first quarter 2023 adjusted EBITDA to be up approximately 6% from Q1 of 2022. From Q1 onward, we expect sequential improvements through Q3 and then down slightly in Q4. From an operating cash flow perspective, we expect typical seasonality with negative operating cash flow in Q1 of approximately $70 million and then positive cash flow with sequential improvements throughout the year. Other key assumptions in connection with our 2023 guidance are outlined on slide 13 in today's PowerPoint presentation, located on our investor relations website. With that, I'll turn the call back over to Carrie.

Thank you, Matt. In closing, I'm very pleased with our 2022 results. We delivered on our 2022 commitments, resulting in record revenue and adjusted EBITDA, along with strong cash flow growth. Looking forward to 2023 and beyond, we will benefit from tailwinds in both our federal solutions and critical infrastructure segments, with all six of our end markets simultaneously growing. Cyber, space and missile defense, critical infrastructure protection, transportation, environmental remediation, and urban development. We have a leading national security portfolio positioned to deliver solutions that outpace near-peer threats and we're a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of heightened spend. And as a collective company, we are uniquely positioned to capitalize on areas that cross over between federal solutions and critical infrastructure. Before we begin the Q&A session, I'm pleased to announce that we will be conducting our Investor Day on March 15th at the New York Stock Exchange. This will be a great opportunity to learn more about our strategic vision hear from business unit leaders, and participate in Q&A sessions. We hope you will join us for this event. With that, we will now open the line for questions.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 in your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Bert Subban with Stifel.

Hey, good morning. Good morning. Morning, Bert. Hey, Kerry, Matt. Could you maybe help walk us through the guide in a little more detail? You know, if I look at 4Q, critical infrastructure had a super strong quarter, margins turning the corner a bit, you know, organic growth well ahead, I think, of expectations. Is there a view that that momentum slows in 23, or is this more federal solutions-driven? I know you said you expect organic growth in both, but if I look at sort of the EBITDA in 22 relative to 23 and sort of layer in the annualization of Exator and some of the growth on critical infrastructure, it would seem like maybe there's more upside. Is this sort of a conservative view, or do you have an expectation that federal solutions sort of steps back a little bit?

Yes, so we're going to continue our trend of putting together measured guidance for 2023. So we have total growth at 7%, organic growth at 4%, which is 5% for critical infrastructure, 3% for federal. We have some headwinds, I'm going to say, on the federal side of the house in terms of revenue. We have two specifically. Salt waste processing facility is $20 million, and then quadulin declining because we've reached the peak of performance is $67 million. So we'll be offsetting that from a revenue perspective. On the critical infrastructure side, obviously, we remain very strong. We're pleased, I'm going to say, also with our continued track record of competitive wins. We have a strong win percentage of 49%. We still have about $8 billion of awards that we have not put into backlogs. So those are single awards that we've won. But just because of the bookings approach we take, and a great example is Giant Mine, where we expect the program to be worth $2 billion, but it's $270 million. From a margin perspective, as we go from this year into next year on critical infrastructure, we expect to have higher equity and earnings of $8 million, which will help boost our margins there. If you look at critical infrastructure, which is where we think the most margin potential is, we're going to be focused on operating leverage and having our revenue continue to outpace our cost growth as we did this year, having continued strong program execution, the higher equity and earnings, and then we're fortunate where demand is much greater than supply in a growing infrastructure market.

And one thing, Bert, I'd add, you know, specifically for Exitor, we're expecting about $110 million of organic growth for 2023. So, you know, they had a strong wrap-up to the year, so about $110 million of inorganic for next year.

Okay, yeah, no, that's super helpful. If I think through, you know, maybe focusing on the federal solution side, I know, Carrie, you said before, you know, much more heavy exposure to RDT&E. It looks like those budgets are going to be, you know, those budgets are going to be really strong in 2023. Can you just sort of walk us through how you maybe think about your business correlating with those budgets, you know, what the opportunity set looks like, you know, whether it be on your missile defense contracts, whether it be in your cyber contracts? And then just in addition to that, is there an update on where TSSC stands? I know that was your largest recent piece.

Yes, so we are excited about the overall defense budget as well as the RDT&E budget, which is definitely going to be focused on near-peer threats. There is that we expect to continue growth or cybersecurity, both on the offensive, defensive side. We play very heavily on the convergence of cyber electronic warfare and information warfare to be able to fight a war against a nation state such as China. Base and missile defense will both continue to be high growth areas for us as well as critical infrastructure protection. Again, we're fortunate that all of our end markets are simultaneously growing and boosted by a strong defense budget as well as a strong RDT&E budget. On the repeat for the FAA contract, we anticipate an announcement likely second quarter of this year. And again, we feel that based on our several decades of strong performance for that customer, that we're highly optimistic that we will be awarded that contract.

Great. Thanks, Carrie. Thanks, Matt.

Thank you, Bert. Thanks, Bert.

Thank you. And the next question comes from Toby Summer with Truist.

Thank you.

Within the infrastructure segment, could you talk about the the contribution to growth from Saudi and the infrastructure bill in the U.S. and how it's tracked versus your expectations so far and when you think the peak for those contributions to the company's growth and profit may be sort of out in the future?

Sure. So let me start off with... I'll start with the U.S., the infrastructure bill. We have already started to see some infrastructure bill funding. Generally, that's come through federal aviation and federal rail and transit. There's two types of infrastructure funding. There are the formula funds, which are the ones that are quickest out, and then there's grant programs, and particularly new grants, which take a little bit longer. From a planning perspective, we've assumed that we're going to see a ramp up as we approach the end of 23. and going into 24 with a likely peak around the 26 timeframe. The nice thing on the infrastructure funds is the money's going to last a long time, and our estimate is somewhere around six to eight years in terms of long-term funding. In the Middle East, both based on the Saudi vision 2030 as well as the strong oil prices that we've experienced over the year, they were able to move many of their programs to the left. So we were awarded, as I mentioned on the call, two of the GIGA projects for the Middle East, as well as the Riyadh Metro, which is the largest metro system in the world. And we're doing some other efforts around entertainment venues and mixed-use housing. In addition to Saudi, the UAE also has a large emphasis right now on transportation and urban development. So we've seen quite a bit of growth there. That comprises today our whole Middle East business, roughly over 600, 650 million of annual revenue. And that will continue to grow as we move into next year. We're not yet at a peak. I would say somewhere in the next couple of years we would expect to see that peak, but we're definitely still on the incline.

Thanks. And if I could ask one federal question. If you look for in your guidance for relatively modest organic growth there, how would you sort of rank order the expected areas of contribution to that growth? You did mention cyber, offensive, and defensive in some of the areas where you sit there, but how does that compare to space and other areas of focus within that segment?

yes so um thanks toby and again we do take measured guidance um so from a contribution perspective engineered systems um will be organically declining but overall growing because the extort contribution because that's where the two programs i mentioned earlier the salt waste processing facility and the quadrant reside but within engineered systems We're seeing substantial contribution in critical infrastructure protection. Exator in particular has had very strong win rates focused on electronic security systems, counter unmanned air systems, and overall base protection. Within the defense and intelligence area, we have seen growth this year on our missile defense program where we've been supporting the Missile Defense Agency for over 40 years. We're starting to see a little bit of surge effort in areas like defense of Guam and continued focus on hypersonics. I would say cyber and that kind of convergence of cyber electronic warfare, information warfare, which falls under our defense and intel, will be the fastest area of growth, though. And then we do expect to see continued growth in space, particularly around space launch, space domain awareness, and space resiliency. Thank you, Toby.

Thank you.

Thank you. And the next question comes from Josh Sullivan with the Benchmark Company.

Hey, good morning.

Good morning, Josh.

There have been a number of high-profile near-misses related to the FAA as well as some rail issues getting more attention here. Could there be any accelerated opportunities for you coming out of the infrastructure bill because of this?

So we are looking at those areas. Right now, the effort that we're focused on is technical service support, where we supply support to all their FAA sites throughout the United States. One area of big focus, to your point, is going to be how do we modernize the FAA system, and that's an area that we are looking at pursuing. So we do anticipate some future growth there. On the rail side, we implemented at the end of last year to meet the federal mandate, the Positive Train Control Program 1.0. There's an additional 2.0 focus, which is how do we capture some of the data that's coming off the systems that we've now installed and be able to do better predictability to improve safety and efficiency. So we're focused on that with our customers. And I would add a third area is going to be cybersecurity. Both of those areas are very focused on how do they make sure that they're protected against cyber threats.

And then when you look at those 11, you know, $100 million awards you've received, how much more runway is there on those large opportunities going forward?

It really varies. So if I take Faro Mine, for example, that we announced at the end of last year, that's a 20-year program. Giant Mine is a 12-year program. Some of the others are five-year programs. So it really varies by contract.

And then just one last one. What are you seeing as far as labor availability and cost? Do you see any moderation anywhere?

So we had just a little bit of wage inflation increase this year. What we're seeing is we expect that to go down somewhat as we go into 2023. I'm really pleased with both our hiring and our retention efforts, though. If you look at Q4 over Q4 from 2022 to 2021, we grew hiring by 33%. And if you look at the full year for 2022 over 2021, we grew by 42%. So I think our team's doing a fantastic job of recruiting people. And I'd say on the other side of it, we're running well below the PwC industry benchmarks for retention. So that means we're doing a terrific job, obviously, of being able to drive our organic revenue growth.

Great. Thank you.

Thank you, Josh.

Thank you. And the next question comes from Arianna Perez-Moore with Bank of America.

Good morning, everyone.

I'm going to do a follow-up question on federal solutions. I'd like to understand how you're thinking about a potential continued resolution into fiscal year 24, because I do agree fiscal year 23 is strong. The threats are not easing, but there is a political environment that could end up in a continued resolution next year. So how are you thinking about risk to that in your existing programs and also in the opportunities there?

Thanks, Mariana. Great question. On the continuing resolution, first, we have the ability to run a full year without seeing an impact due to the CR. I also mentioned earlier, we have $8 billion of contract ceiling value that we haven't booked that we've been driving task orders over to, and that was a large contributor to us being able to achieve our organic growth. So we can run a long way kind of under our existing ceiling that we have in place. I'll also say, you know, it's kind of hard to speculate on the overall budget picture, but I will say persons in our overall industry, we've learned to be able to manage through this budget turbulence. We've obviously had it for decades now. And given that we have so much demand in both our national security and our critical infrastructure market areas, we can run quite a while without having any impact.

Perfect, thank you. And then, if I may, another question on M&A. Would you mind discussing how is the environment on M&A where you see opportunities right now?

Yes, thanks. On the M&A area, we're looking at both federal solutions and critical infrastructure. We're going to keep our very high criteria, be selective in the companies that we buy, look at companies that are growing greater than 10% on the top line, have greater than 10% EBITDA margin, And most importantly, are technologically differentiated to be able to accomplish our customers' emerging missions. We have a robust pipeline and expect to continue our pace of doing at least one to two deals a year.

How is the pricing of those right now? Are transaction prices adjusting to the new interest rate environment?

Yeah, Mariana, to be honest, we haven't really seen as much of a reduction in expectations on the sell side. So we are optimistic that you'll start to see some pressure. So as Kerry mentioned, we're very diligent as we go through the process. And I will say we probably passed on a couple of deals in the last two quarters, I would say, because of higher expectations than we were interested in.

Perfect. Thank you. Thank you.

And the next question comes from with Jefferies.

Thank you, and good morning, everyone. Good morning to you.

I wanted to dig into FS margins a little bit more. They dropped off in the quarter, and you mentioned salt waste and coagulant that are 60 million headwind or 80 million headwind combined. You know, what's kind of going on with profitability? Are those contracts just higher margin? Can you talk a little bit about that and your outlook for flats?

Yes, so first, overall for the year, we're very pleased with our federal margins. We came in at 9%, which is what we expected to come in. In the fourth quarter, we had some unfavorable rate impacts. A year ago, we had kind of a pickup on rates. And so if you look at the year-over-year, that basically was the main contributor there. Again, from a margin perspective, I'd say federal delivered as expected at the 9% range for the year.

Yeah, Sheila, I'd add, and Kerry kind of hit on this, but I would say throughout the year you saw we had a really strong base and managed our costs well. So kind of the downstream effect of that is in Q4 when we update billing rates, we kind of come down and it has a negative impact. So I would say the programs that are running off really don't have a substantial margin impact. SWPF was favorable. Quad is probably a little bit of a lower margin. So that coming down could be a little bit accretive for us. And so, you know, the positive side of the rate impact is, you know, while it was unfavorable for Q4, longer term, lower rates helps us from a competitive perspective and gives us some more capacity within our single award IDIQ. So not a great story for the quarter compared to last year, but all in all, really positive to Carrie's point, 9% for the total year was in line with our expectations.

And just when we look forward for 23, the flat guidance, you know, are there any puts and takes in that? you know, M&A as a potential contributor? Like, why is, I guess, the outlook flat, and how do we think about that?

Well, from a margin perspective, we're going up 20 basis points in 2023 over 2022. We have not assumed new M&A in there, so to your point, Sheila, that would definitely be additive, as it has been as we've done past M&A, and that M&A has largely been reflected in federal funds. And Sheila, were you talking on the top line?

No, no.

No, no, all good. No, that's super helpful. And then just on CI, it was someone asked already, but the mid-single-digit organic growth guide, how do we think about the Middle East contribution versus other regions?

So the Middle East contribution will continue to be very strong, but I'd say we're seeing strength across the board. North America has picked up both the U.S. with the IIJA funds rollout there. as well as Canada, where they passed their bill back in 2016 and were involved in 27 of the leading 100 infrastructure programs, roughly a third within Canada. I would say it's just making sure that, again, we have measured guidance that we continue our hiring that we've been able to do and continue our retention and continue our program execution.

Great. Thank you.

Thank you.

Thank you. And once again, if you would like to ask a question, please press star, then one. And our next question comes to Kai Von Rumer with Colin.

Hello, this is Spencer Bradsky on for Kai. Thanks for taking the question. It looks like your full year book to bill at Federal Solutions was below one in 2022. Given this, what should we expect for bookings in Federal Solutions in 2023? Thank you.

Yeah, thank you, Spencer. So we've planned for a booked a bill of 1.1 for federal in 2023. As you know, awards are very lumpy. I think what's really important is the ability to drive organic revenue, which we've been able to do at, you know, 9% for the company, 12% in critical infrastructure, 6% within federal. Continuing our strong win rates of 49%, which is very good. And then, again, we have quite a bit of bookings that you don't see reflected because our approach is to book the base year, make sure that we get up to that level of funding, then we book the follow-on option years. So a great example there is our team's contract for Missile Defense Agency. Even though the award was $2.24 billion, we've only booked $618 million. I would also, one last point too, Spencer. We were awarded two contracts right at the end of the second, right at the beginning of Q1, just missed Q4. One of them we've already announced for $94 million for an intelligence community delivering cyber solutions. The second one is a large contract also that's been negotiated, and it falls within the federal as well.

Thank you.

Thank you.

Thank you. And the next question comes from Louis de Palma with William Blair.

Cary, Matt, and Dave, good morning. You announced the large farrow mine extension. Cary, are there other large environmental remediation projects similar to the farrow and giant mine programs in your pipeline?

Yes, so we announced Faro last year and we announced Giant Mine this quarter. Both of those are very significant jobs in the billions of dollars. And again, Faro will run about 20 years and Giant will run about 12 years for us. There are other large reclamation jobs. What we're starting to see is the United States is really putting an increased focus on it. We formed some partnerships with groups such as Navajo Nations to be able to do a pipeline there. Now, having said that, the two mines in Canada are some of the largest mines in the world, so the magnitude will be quite the same, but there are opportunities within the U.S. as well.

Great. And these contracts are very long-term in nature. In general, for environmental remediation projects that have a 10-year duration, the revenue recognition and margin structure work over the course of the contracts?

So first off, Matt will have something to add, I'm sure, here in a minute. But first I will say on these contracts, they are continuation efforts, but we're going to see expanded scope. So, for example, on giant mine, we expect our scope is increasing by about 66% as we move into term two because the amount of work that has to be done versus term one.

Matt, you want to talk about the rubric? Yeah, just on the rubric side, it's standard, you know, cost to cost. So, it would be as the cost comes in, we'll be recognizing revenue. There's no, you know, pre-recognition or anything on any substantive part of it. On the margin side, I would say it's probably pretty flat throughout the period. The opportunity would be as they ramp up and grow, we'll get a little bit of an absorption opportunity. So there could be some growth in margin, but I don't think it'll be substantive enough to drive the overall company necessarily.

Great. And switching gears with the rising geopolitical tensions and accelerating development of counter-hypersonic missile activity, what are your general expectations for Your missile defense agencies work in 2023 and beyond. It seems as though there was strong funding in the defense budget. But what are your expectations, even if there's a threat of a continuing resolution or a shutdown in 2024? Thanks.

Yes, so our contract, again, has already been awarded for the $2.24 billion. Within that, we have a 40% surge clause that they can exercise at any time. There's three areas of focus for the Missile Defense Agency. One is defense of the homeland. Second one is defense of Guam. And the third one is the counter-hypersonics activity. So those are the three priorities that our team is supporting Missile Defense Agency on today.

Excellent. Thanks, Carrie. Thanks, Matt.

Thanks, Louie. Thanks, Louie.

Thank you. And that's all the time we have for questions this morning. So at this time, I'd like to turn it over to David Spilly for any closing comments.

Thank you. And 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.

Thank you. The conference is now concluded. Thank you for attending today's presentation.

May not disconnect your lines.