Parsons Corporation

Good day and thank you for standing by. Welcome to the second quarter 2023 Parsons Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, 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 2023 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, Chair of President and CEO, and Matt Opelis, CFO. Today, Carrie will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our second 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 anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2022 and other SEC filings. 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 Parson's second quarter 2023 earnings call. I am very pleased with our results again this quarter. Our momentum continues as we delivered another record quarter with all-time highs for total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. In the second quarter, we achieved organic revenue growth of over 20% in both business segments and won six contracts over 100 million, all company records. Our record growth was driven by winning key contracts in both segments, ramping up new contract work, growing revenue on existing contracts, and record employee hiring and improved retention. In addition, our successful M&A program is contributing to growth by enhancing our ability to win large strategic contracts with differentiated technical solutions. I will also note that for Q2 and the first half of 2023, total adjusted EBITDA growth exceeded revenue growth. In the second quarter, total revenue increased 34%, while adjusted EBITDA grew by 53%. And for the first half of 2023, total revenue grew 29% and adjusted EBITDA increased 38%. Our ability to drive adjusted EBITDA growth faster than our strong revenue growth demonstrates our focus on margin expansion. We have the right portfolio and the right team to continue to capitalize on unprecedented global infrastructure spending and the increasing demand for national security solutions, especially in high-priority growth markets such as cyber and intelligence, space, electronic warfare, information operations, and artificial intelligence, all of which address near-peer threats. These positive factors provide us with the confidence and visibility to raise our full year revenue, adjusted EBITDA, and cash flow guidance, which Matt will discuss in a few minutes. During the second quarter, we achieved a book-to-bill ratio of 1.4 times on an enterprise basis. These results were driven by a 95% year-over-year increase in contract awards. This is now the 11th consecutive quarter in which critical infrastructure's book-to-bill ratio has exceeded 1.0 times. Our robust bookings and record year-to-date win rates were driven by delivering on our customers' missions moving up the value chain by offering higher-end capabilities, developing differentiated technology solutions, and hiring and retaining a prestigious workforce. We were awarded six contracts that exceeded $100 million during the second quarter and one more just after the quarter ended. These large contracts span both business segments and provide increased visibility to our financial outlook. Significant second quarter contract wins included the Federal Aviation Administration's $1.8 billion ceiling value repeat contract to support their aviation system capital investment plan, of which we booked the three-year base period for $641 million. Parsons has been the prime contractor on this work for more than two decades, and we look forward to continuing to support this important customer. With the Infrastructure Investment and Jobs Act, the FAA has $5 billion of additional funding for facilities-related work. Also with this FAA win, we've secured all four of our major repeats of approximately $2 billion each, and these contracts span the next seven to 20 years. We were awarded a new five-year single award contract from the General Services Administration with a potential value of $1.2 billion, of which we booked the one year base period for $217 million. This contract supports the Department of Defense and its strategic partners in delivering global quick reaction capabilities, leveraging advanced technology solutions across the all domain battle space. We won a $170 million task order contract by the Defense Threat Reduction Agency under the assessments, exercises, modeling, and simulation support IDIQ vehicle. This contract contains new and existing work to provide vulnerability assessments, design reviews, and analysis that advances the Department of Defense and Defense Threat Reduction Agency's missions to counter and mitigate a broad spectrum of existing and emerging vulnerabilities and threats. We booked $34 million on this contract in the second quarter. We were awarded a new $130 million single award contract as lead designer for the Port Authority of New York and New Jersey to enhance infrastructure at the John F. Kennedy International Airport. The scope includes a new on-airport roadway transportation network, parking garage, pedestrian bridge, and utility upgrades. We booked this entire contract value in the second quarter. We were also awarded a new $127 million contract as subcontractor to a federal customer of which Parsons booked $25 million to deliver detection technology solutions. We were awarded a $109 million repeat contract from the United States Cyber Command to provide cyber capability, discovery, development, testing, and advanced analytics. We booked $52 million on this contract in the second quarter. This is our second consecutive win with the Cyber Command this year, and we're excited about our position supporting this critical customer's mission. Cyber Command is now gaining budget authority in recognition of their importance to national security. In addition to the six wins greater than $100 million each, we were awarded a new $93 million single award contract to complete project and design management for a major development in Saudi Arabia. We booked the entire value of this contract in the second quarter. And shortly after the quarter ended, the NASA repairs, operations, maintenance, and engineering contract was awarded to our prime contractor. Parsons' work share is $130 million. During the second quarter, we also closed on our acquisition of IPKeys Power Partners. This strategic acquisition expands Parsons' presence in two rapidly growing end markets, grid modernization and cyber resiliency for critical infrastructure. IPT enables Parsons to bring cybersecurity tools, technology, and market experience to utility operators to secure operations, optimize efficiency, and achieve grid resiliency. I'm very pleased with our M&A program. especially with the strong execution of our recent XTOR acquisition. Our acquisitions have enabled us to prime and win large contracts. Our strategic and selective approach to acquisitions has enabled us to move up the value chain and create differentiated positions in our six core end markets. We have an active M&A pipeline across both segments, and we will continue to use our strong balance sheet to complete additional accretive acquisitions that drive growth and margin expansion into our business. As part of our long-standing commitment to ESG, in April we released our 2023 ESG report detailing how we're making the world safer, healthier, and more sustainable. As part of this report, we announced that we already exceeded our 2025 target to reduce Scope 1 and 2 emissions by 20%. As a result, we published our commitment to set updated near and long-term targets for greenhouse gas emission reductions aligned with science-based target initiatives. During the quarter, we were recognized as a top employer for diversity by distinguished organizations, including Forbes, Women Engineering Magazine, and the Washington Business Journal. In addition, we were recognized by VETS indexes for our commitment to support veterans. As a result of our ESG commitment, we were upgraded by Institutional Shareholder Services, or ISS, to prime status. This label is awarded to companies for successfully managing sustainability-related risks and opportunities and achieving the best ESG scores among their peers. I'm also proud to share that Parsons was part of the team that helped the United States comply with the 1997 Chemical Weapons Convention Agreement. by destroying our country's last chemical weapon. The final sarin nerve agent-filled M55 rocket was destroyed on July 7th. I want to congratulate the hundreds of Parsons team members and the many partner personnel that supported this mission over the years, leading us to this monumental accomplishment. As a result of the major milestone achievement on this contract and one other chemical weapons destruction program this quarter, our federal solutions segment earned $20 million of one-time incentive fees, driving its adjusted EBITDA margin to over 11% for the quarter. Relative to our two legacy critical infrastructure programs, our margin was impacted by $28 million this quarter. While the write-downs are disappointing, we've made significant progress on both programs, bringing them to over 95% and 75% complete, with final completion dates expected in early Q4 2023 and late 2024 respectively. For the program that ends in 2024 during the second quarter, we demonstrate important progress against technical requirements. In summary, we had an excellent second quarter. I'm extremely proud of the hard work and performance of our talented employees. They have consistently delivered strong results over the last two years. In the second quarter, we achieved record total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. We also reported a 1.4 times book-to-bill ratio by increasing contract awards by 95%. Additionally, we continued to execute on our strategic M&A program and plan to continue to leverage our balance sheet for additional accretive acquisitions. As I look forward, I'm extremely excited about our bright future. We are in six great markets with differentiated technology that are all simultaneously growing. We have an experienced management team that is delivering strong results and promoting a people-first culture, which is enabling us to be one of the organic growth leaders in both of our business segments. With that, I'll turn the call over to Matt to discuss our second quarter financial highlights. Matt?

Thank you, Carrie. As Carrie indicated, our second quarter was highlighted by record results in a number of areas, including total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. Total revenue of $1.4 billion for the second quarter of 2023 increased 34% from the prior year period and was up 23% on an organic basis. Organic growth was driven by the ramp-up of recent contract wins and growth on existing contracts. In the second quarter, our acquisitions contributed approximately $121 million of inorganic growth. As a reminder, our Exitor acquisition closed at the end of May 2022, so only June 2023 results are reflected in our second quarter organic growth. SG&A expenses for the second quarter were 16% of total revenue, compared to 20% in the second quarter of 2022 due to a continued focus on efficient growth across the portfolio. The adjusted EBITDA of $118 million increased 53% from the second quarter of 2022. This increase was driven primarily by volume on new contract wins and the incentive fees from the chemical weapons destruction programs, as well as contributions from our Exitor acquisition. The year-over-year 100 basis point margin improvement to 8.7% was driven by recent contract awards, our Exitor acquisition, and operating leverage. I'll turn now to our operating segments, starting first with Federal Solutions, where second quarter revenue increased by $225 million, or 42% from the second quarter of 2022. This increase was driven by organic growth of 20% and $118 million from Exitor. Organic growth was driven primarily by expansion with the Department of State, growth on new existing contracts, and the incentive fees previously discussed. Federal Solutions adjusted EBITDA increased by $38 million, or 80%, from the second quarter of 2022, and adjusted EBITDA margin increased 230 basis points to 11.2%. These increases were driven primarily by the $20 million non-recurring incentive fees and contributions from Exitor. Moving now to our critical infrastructure segment. Second quarter revenue increased by $123 million, or 26%, from the second quarter of 2022. This increase was driven by organic growth of 25% and $3 million from our IP Keys acquisition. Organic growth was driven by higher volume in both the Middle East and North America. Critical infrastructure adjusted EBITDA increased by $3 million, or 10% from the second quarter of 2022. Adjusted EBITDA margin decreased 80 basis points to 5.5%. The adjusted EBITDA increase was driven by higher volume on new and existing contracts. The stronger core margin was impacted by $28 million of write-downs on two legacy programs. Notwithstanding, we continue to see margin expansion within critical infrastructure, excluding impacts from the two legacy programs. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q2 2023 was 76 days, up four days from the prior year period. During the second quarter of 2023, we generated $23 million of operating cash flow, compared to $51 million in the prior year period. The decrease was driven by timing of collections on a few large receipts, which were collected early in Q3. Additionally, working capital was consumed to support the strong growth in the quarter as new programs ramped up. Consistent with typical seasonality patterns, we expect cash flow to be strong in the second half of the year to get us to the midpoint of our increased guidance for 2023. Capital expenditures totaled $10 million in the second quarter of 2023, which is relatively consistent with the prior year period. CapEx continues to be well-controlled and remains in line with our planned spend of approximately 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of less than 1.4 times after the $43 million all-cash IP Keys acquisition, which closed in April. Our low leverage, strong free cash flow outlook, and undrawn borrowing capacity enable us to continue to make internal investments and accretive acquisitions to support long-term growth. Turning to bookings for the second quarter, year-over-year contract award activity increased 95% to $1.9 billion, which is the highest in our company's history. The strong bookings performance was driven by a 201% increase in our federal solutions segment and a 25% increase in critical infrastructure. Our book-to-bill ratio for the second quarter was 1.4 times with federal solutions at 1.5 and critical infrastructure at 1.3. On a trailing 12-month basis, our book-to-bill ratio remains a healthy 1.2 times, with critical infrastructure at 1.2 and federal solutions at 1.1. Our record backlog at the end of the second quarter totaled $8.9 billion, up $674 million, or 8% from the second quarter of 2022. Now I'll turn to our guidance. We're increasing all of our 2023 guidance ranges provided on May 3rd to reflect our record second quarter results, recent large contract wins, hiring and retention momentum, positive end market exposure, and our outlook for the remainder of the year. For 2023, we're increasing our revenue range by $350 million to $4.85 to $5.05 billion. This represents total revenue growth of 18% at the midpoint and 12% on an organic basis. Additionally, we're increasing our adjusted EBITDA range. We now expect adjusted EBITDA to be between $410 and $440 million, which represents 20% growth at the midpoint of the range. Margin at the midpoint of our revenue and adjusted EBITDA ranges remains at 8.6%. We are also increasing our cash flow guidance. We now expect operating cash flow to be between $280 and $340 million, representing 31% growth at the midpoint. Free cash flow conversion is expected to remain around 100% adjusted net income. Our updated guidance represents 8% of additional revenue and adjusted EBITDA growth at the midpoint of our ranges. These increases reflect greater visibility into customer demand, funding on new programs, and higher confidence in the staffing and retention estimates. Other key assumptions in connection with our 2023 guidance are outlined on slide 11 in today's PowerPoint presentation located on our investor relations website. In summary, we delivered record first and second quarter financial results. Through the first half of the year, we have achieved revenue growth of 29% and adjusted EBITDA growth of 38%. We're confident in our ability to achieve our increased 2023 guidance as a result of record total backlog, continued hiring and retention momentum, strong global infrastructure spend, and new award activity in our federal solutions portfolio. With that, I'll turn the call back over to Carrie.

Thank you, Matt. I'm very pleased with the performance of our company over the last two years. We continue to be one of the top leaders in organic revenue growth in both of our segments. Given our strong awards, revenue, and adjusted EBITDA performance, we are raising guidance for all three of our financial metrics. Looking forward, we have a company with a unique portfolio that is well positioned in two complementary business segments. All six of our end markets are growing, and we continue to win new business in each of them with company record win rates. As a destination employer, we're exceeding hiring and retention goals as employees seek to work for a firm that combines value-driven mission with an entrepreneurial culture. Our M&A program continues to be successful, and the companies that have joined the Parsons family have strengthened our technical differentiation and moved us up the value chain. Thank you to all the Parsons employees for their dedication and support of our customers' missions. With that, we will now open the line for questions.

As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touch tone telephone. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Toby Sommer with Truist Securities.

Thank you. Can you hear me?

Yes. Morning, Toby. Hey, Toby. Thanks. Good morning. I was wondering if you could describe the factors that would explain what looks like, by my math at least, sequential top-line declines implied in guidance in 3Q and 4Q. Is there something seasonal or some work that was completed in the quarter that would help us understand that?

Yeah, Toby, so if we're looking at the second half specifically, we've talked a little bit in prior calls about some headwinds related to Kwajalein, specifically that program completed that peaked in Q3 of last year, so that's a bit of an impact. We also, to your point, have seasonality through the summer months. Obviously, a good portion of our growth has been driven by Middle East and some of the Department of State work, so we have some summer months where the seasonality adjusts a little bit. And then obviously the Q4, we have a little bit of budget uncertainty. If things go well and we continue down the hiring trends, we'll kind of trend toward the high end. But right now, the midpoint, we're pretty comfortable.

Okay. And then from a modeling perspective, is there, if we look into 2024, does the non-recurring fee that you described in the third quarter, Does that provide a real significant headwind to EBITDA growth next year?

No, we don't believe it does, Toby. We're still on track with our long-range targets that we provided at the investor day.

Yeah, so Toby, I would say if you think about the federal and CI businesses, as we've mentioned before, federal, we typically are in the high eights, low nines from a margin perspective. Our goal by 2025 is to get the CI business over 9%. So I'd say, you know, somewhere in those ranges is a fair number.

Okay. And last one for me, if I could. What does the cadence of re-competes look like over the next couple years, having recently kind of won and retired some pretty significant re-compete risk? Thanks.

Yes, Toby, for the rest of this year, it's 1%, and for next year, it's 9%. We're very proud of the fact that we won all four of four major repeats and particularly pleased with the duration of those programs spanning 7 to 20 years. Thank you very much.

Thank you.

Our next question comes from the line of Burt Subin with Stiefel.

Hey, good morning, and congrats on the strong results in the quarter. Thank you, Bert. Thanks, Bert. Matt, maybe just to follow up to your comments there to Toby, you know, absent the project write-downs in the quarter, I think your CI adjusted EBITDA margin would have been over 10%, something like 10.3%, which would imply you're already outpacing that 9-plus percent CI margin target. So is that just a one-time thing? Was there something, I guess, beneficial in the quarter outside of the headwind you had from the $28 million project write-downs?

Yeah, I would say, you know, I think to your point, Bert, we're starting to see the core business within CI is executing. As Kerry mentioned, we have that one program wrapping up in early Q4. It's kind of slipped into October within the quarter. And then the second one will be middle of next year. So, again, it's the core business is executing where we expect it to be longer term. it's really kind of getting through these challenge programs. So again, we feel comfortable with targeting CI in the low nines over the next couple years.

Yeah, just to add to that, so as you mentioned, we were about 10.2 pro forma for the quarter for CI margins. For the first half of the year, we would have been at 8.7 pro forma. We are fortunate one of these programs is very close to wrapping up. In fact, we're in the final punch list stage for that. That'll complete in Q4, early Q4 of this year. And the second program, we had terrific results this quarter in terms of demonstrating some key technical requirements, which gives us confidence in the end of 2024 date.

Got it. Maybe more like a high-level question for you, Carrie. You know, if I look at the recent success, you know, you've won a ton of contracts on the FS side, a lot of success in CI, both in North America and the Middle East. It's created a pretty impressive organic growth setup. I think the main risks to that were hiring around some of the new contract wins on FS, particularly things that involve cyber classified work, and then these legacy projects. How should we think about, I guess, both going forward? On the hiring front, do you see a pretty good path to hiring those classified and cleared individuals? And then on the legacy projects, are you pretty comfortable this is you know, sort of the last write-down related to these projects?

So I'll take your last part first. On the legacy projects, we obviously can't predict unknown unknowns, but as of this point, you know, we've guided to where we think we are at the end of this quarter. And again, both programs are demonstrating completion progress and nearing the end, one at 95% complete, one at 75% complete. On the hiring, we've been doing a great job across the board. We have increased net headcount in all four of our business units, including the cleared segment. We've also done a terrific job on retention. And year over year, our retention improved by 2%. So our HR department and all of our business units have been doing a great job of attracting and keeping quality people within Parsons.

Great. Thanks, Carrie. And just one final question. Can you give us any update on how you're thinking about PFAS, PFAS? I know that had the potential to be a tailwind. Do you think that's, you know, being moved up to 23? Is that still more of a 2024 story? Thank you.

Yes, we're starting to see more demand for PFAS, PFAS, as you've seen in the news with particularly some of the industrial and manufacturing companies. When we look at the addressable market for that, it's about a $200 billion addressable market out of which persons, services, service addressable market is around $45 billion. So we're involved mostly today still in the investigations, and then we'll get more involved in remediations as time goes on. With the increasing standards that are being put in place by the government, we expect to see that accelerate as we look over the next couple of years.

Great. Thank you, Karen. Thanks, Matt.

Thanks, Bert.

Thanks. Our next question comes from the line of Sheila Kailou with Jefferies.

Good morning, guys. Thank you so much.

So I just wanted to ask on the top line first off, like great quarter on every single metric possible. So if you could just talk about what's going on with the top line, great organic growth of 23%. Are you guys changing the way you win business? How much of it is coming from your addressable market getting bigger? It seems like CI has some major tailwinds as well, but you guys are also doing the right thing. So if you could talk about just your updated guidance, how much of it was tied to new awards versus on-contract growth versus hiring coming in better, and then I'll have a follow-up.

Yeah, Sheila, good morning. So we're very pleased, and I'd say all four of the business units and all six of our end markets have been hitting on all cylinders today. What we've done, probably if there's one change, we've moved up the value chain as a result of inorganic investment and then organic M&A. So being able to string together capabilities end-to-end has allowed us to win significant jobs like the $1.2 billion GSA job that we were awarded. We're also very selective on what we bid, and we've delivered extremely high win rates record for the company at 72% year-to-date. Addressable market, again, it's really back to our six core markets. We're in cyber and intelligence, space and missile defense, transportation, environmental remediation, urban development, and critical infrastructure. And we're at a fortunate time that all of the compound annual growth rates are increasing between 5% to 12%. So all we have to do is really stay laser focused on the six markets the customers that we have, the capabilities that we deliver, and continue to move up that value chain and bid and win bigger programs. This year, year-to-date, we've won 10 jobs greater than $100 million. That compares with 11 for the full year last year, so we're in a very strong trajectory. We've seen both new business wins as well as on-contract growth across the board. And hiring is, again, it's stronger this year than it was last year, which was already a very good year, and retention's improved by 2%.

Got it. No, that's super helpful. And then maybe you mentioned some of these already. So as we think about the second half, what really comes off on the organic decline would be, well, not organic decline, but only up 10 and up 6%. As we think about Q3 and Q4, how does the FAA contract ramp factor in there and then the GSA win as well?

Yes, so Matt mentioned earlier we have a headwind from Quadulin of about $55 million, and there's a couple of small contract completions. We have factored in government budget uncertainty, particularly on the federal side, and we do have tougher comparables. FAA, to your point, does have seasonality that's positive that we factored in increasing for the second half.

Great. Thank you.

Thank you.

Our next question comes from the line of Kai Von Rumer with TD Cowan.

Thank you very much. So, wow, great quarter.

Congratulations, really. Thank you, Kai. Could you maybe help us kind of reset, you know, given the numbers were so big, where you expect to be at your midpoint at both Fed systems and critical infrastructure?

Yeah, so for the total year, we expect to have 18% growth and 12% organic. And Matt, you want to share the federal and CI? Yeah, so for the... 54% federal business and 46% CI.

Okay, that's very helpful. And then, sort of seems maybe too much to ask, but... you know, what do the bookings look like in the third quarter? Because seasonally this is pretty good for the defense IT sector, and I think your historicals are from the Q3 are 1.3, and you've been over one in every year since 2017. So what are we looking for for bookings in both sectors in the third quarter?

So what we've planned for the rest of the year would be just slightly below a 1-0. We do typically, to your point, in the third quarter see very strong federal bookings. And again, if the critical infrastructure volume continues based on global infrastructure spend, that should already remain strong. I did point out earlier we've won 10 contracts greater than $100 million year-to-date, and we already won one of those in the third quarter that we've announced. That was the NASA Rome contract for $130 million.

Got it. And then, so you've raised your adjusted EBITDA significantly. You only increased the cash flow by $5 million. Maybe it's kind of a picky question, but how come not more?

Yeah, good question. Obviously, I think through the first half, we're a little bit, you know, behind, I guess I would say, from where we had planned. I mentioned on the script that we were, you know, we had a couple very large things that were collected early in the third quarter. You know, we're probably, you know, the high end is kind of what we're hoping for. But, you know, given some of the uncertainty, obviously 35% growth in the Middle East year to date, there's a little bit more uncertainty around the Middle East billings and collections. So I'd say if things go well, we do have to do almost $300 million in cash in the second half. So it's just kind of coming up with an estimate that we're confident in.

Terrific. And last one, given how fast you're growing, what's your appetite for M&A? I mean, you're growing so fast organically. Can you basically deliver on that? as well as do acquisitions, or are you basically cooling it for the moment on acquisitions?

We still intend to do acquisitions. We really believe that's been a critical part of our growth story, moving us up the value chain as a solutions integrator, being able to bid and win larger jobs. So we plan to continue. We'll keep the same high bar. So we need to look at companies that are growing greater than 10% top line, have greater than 10% EBITDA margin. We're going to continue to be very selective. You know, I think if you look at Exator being the most recent acquisition and what they've been able to deliver, it's going to be companies like that that are really going to be able to contribute to our growth and couple into our capabilities and make us stronger to be able to win more business. On the federal side, we're going to look at companies in the area of cyber and space and particularly around areas like defensive cyber or critical infrastructure protection. On the critical infrastructure side, we're also going to look at areas of geographies, because if you look at how the infrastructure spend is, the larger states are getting more of the money. So you can expect to see us double down there.

Thank you very much. Thanks, Kai.

Our next question comes from the line of Andrew Whitman with Baird.

Excuse me. Thanks for taking my question. Your success in the federal awards front this year, not only with the re-competes, but just kind of broadly with the awards, is obviously notable here. I was just wondering, in terms of the level of outstanding bids that you have not heard back on yet, how does that compare with earlier in the year, and does any of the uncertainty in the appropriations process that's coming this summer-fall, how does that affect the bidding velocity or the bidding pace that's happening right now, Carrie.

Yeah, thanks, Andrew. So we have $7 billion awaiting notice of award, which is a little lighter than last quarter because we did win so much. I would also point out, though, we have over $12 billion of what I call unbooked ceiling value. So if you look at the way, again, that we do bookings and take, for example, the FAA contractor, That was a $1.8 billion award, of which we booked $641 million. So the rest of that you don't see reflected in our backlog or bookings. It's in that $12 billion of unbooked value. If you look at the appropriations process, we've gotten very used to dealing with uncertain budget environments, unfortunately, with continuing resolutions. And we're able to run through those, both based on that $12 billion of unbooked value. We've got, obviously, a very strong $8.9 billion record backlog. And then 50% of our business is not subject to the CR process, if you look at the amount that we have that's international, state, local, and commercial. So we feel confident we'll be able to run for a while.

And, Andy, I'd just add to your point, you know, that $7 billion of awaiting notice of award, if we look back a couple years, that's almost two times what our run rate was a couple years ago. So, there's still a backlog there, but it's kind of trending in the right direction recently.

And, Andy, we also have a $45 billion pipeline.

Great. Those are all the numbers I wanted. I guess just I think you had a quick comment. Maybe I missed it on win rates. Carrie, can you just kind of maybe elaborate on kind of what you've seen? I know it's been a good year to date. Is there any reason to believe that you've been doing better than expected or worse than expected, or there should be any change in the win rates that you've experienced?

Yeah, we've been doing very well year to date. I mean, I will say if I look back over the last three years, almost consistently every year we've improved sort of by 10% over the last couple of years. This year, we're way up at 72%. And again, I think it goes back to our bidding process. It's being very selective. It's moving up the value chain and positioning early, working with customers. And a key point about our business is we look for emerging customer requirements. So we're not a company that's coming in and always trying to take somebody else's market share, but rather, how do we solve the problems of the future, like the near-pair threat problems? or how do you solve digital transformation within infrastructure? And I think that's a key contributor to our success.

Great. Thank you very much. Have a good day.

Thanks, Andy. Our next question comes from the line of Josh Sullivan with the Benchmark Company.

Hey, good morning. Great quarter.

Good morning. Thank you, Josh.

Just following up on that $12 billion of unbooked value, the international piece, how do we think of the Middle Eastern contract staging or cadence looking ahead? Any large pulls in the tent over the next 12 months?

Yes, so on the Middle East, we've been successful to get on five of five of the GIGA projects, and those are going to continue to grow as they ramp up. The two biggest ones for us would be NEON, the line, and also at NEON would be OXYGON projects. And Cadilla, so knee on the line being the city that's as tall as Empire State Building, as long as Long Island. Their goal is to have 9 million people living there by 2030. Totally sustainable city. And then Cadilla being the largest entertainment city in the world, just outside of Rio. And we're the delivery partner on both of those projects. So I would say those are going to continue to see a ramp. And they have kind of a long tail because that vision runs to 2030. Then outside of Saudi and Dubai and Qatar, you're seeing investment as well. So they have like the projects of the 50 and the UAE that's been defined. There's the Qatar National Vision. So those are strong.

Got it.

And then as far as the sunsetting legacy programs, are there any terminal costs we should think about outside of the write-downs?

No, nothing specific, Josh. But it's just kind of wrapping them up and completing them within the CARNI ACs.

Got it. And then just lastly, hiring and retention. You know, what are you seeing generally in the labor markets as far as wage inflation or availability and retention rates?

Yeah, so we see it's down a little bit from last year. And we're, again, great on retention. We've seen 2% drop year over year is a very big improvement. I'll credit that to our culture, though. I think people come to Parsons, and they really like Parsons. We're a big company, but we act like a small company in terms of our agility, our flexibility. It's kind of a supportive culture, and I think it's just a great place to be. So I believe that's why we're attracting more than kind of our fair share of talent.

Great. Thank you for the time.

Thank you. Our next question comes from the line of Louis de Palma with William Blair.

Carrie, Matt, and Dave, good morning.

Good morning, Lloyd.

It seems that your recent $750 million State Department contract win was for Exitor and the $1.2 billion GSA award seems related to your your black horse acquisition and I was wondering does this encourage Parsons to be more active on the M&A front as your current formula seems to be highly effective right now and on this topic what is the state of the M&A pipeline for you as you've done a fairly significant acquisition every year I think for the past four years but It's just been IP keys this year. So I was just wondering how you feel about the M&A market. Thanks.

Yeah, thanks, Louie. And I'd say M&A is a critical contributor to what we've seen in our growth. Our ability to buy the right companies, to integrate the companies, to retain the leadership and the people has been very important to our success. To your point, the Department of State work growth has been from Exatorc. The GSA win was led by Blackhorse, but it included almost all the companies that we've bought. I mean, it was Legacy, Polaris Alpha, OG Systems, Braxton, QRC, Legacy Persons. And that win, I would say, was really the culmination of all those acquisitions, the ability to quickly integrate, and the ability to go after work that is emerging customer requirements. We still see a very good pipeline on both the federal and the critical infrastructure side. We look at companies every week. We're going to continue to be very selective so that we're buying the companies that enable the growth that we've been delivering.

Great. Thanks, Carrie. And as it relates to the Middle East, how has the labor market been specific to that geography, you reported very strong revenue growth. Is Parsons able to hire enough to keep up with the demand in that region?

Yeah, thanks, Louie. The labor market there has been very good. We hire from about 40 different countries around the world, so we have quite a bit of pull. And the type of projects that we're doing there are first of a kind, one of a kind. So people want to be involved in these because they're so unique. And compared, like, to other countries, they're really in a greenfield stage. So if you're an engineer, there's nothing more exciting than being able to go work on a project like NEOM or CADEA that you may never see in the rest of your career.

Excellent. Thanks, Carrie-Marie and Dave.

Thanks, Zoe.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from Mariana Perez Mora with Bank of America.

Good morning, everyone.

Good morning. The question is, you're expecting 12% organic growth this year. That's what, like three, four times the three-year CAGR you expected. And with just this year, you almost accomplished the lower end of that guidance first. how should we think about the future and organic growth into the next two years? And second, what are the variables that, I don't know, keep you up at night and, I don't know, put you in a place to still build some conservatism in the future?

Thanks, Mariana. Great question. We've had a lot of success and upside to our financial targets, as you point out, during the first half of the year. We've won a significant amount of work We do plan to update our three-year financial targets as a result, and you'll hear from us in either Q3 or Q4 for an update. But for now, from a modeling perspective, I would start with the updated guidance midpoint of $4.95 billion and put our investor day total revenue targets of mid-single growth on top of that higher base. And then your second part of your question was what part keeps you up Oh, headwinds. I would say any of the macroenvironment issues, you know, everything within our control I feel comfortable about. So the question is, you know, do we end up with a longer than a year CR? We talked about quadulin earlier being a headwind in the second half of the year. Does hiring or retention become more difficult? Right now we're not seeing those, but those would be the ones that we would keep an eye on.

Perfect. Thank you. And then on the M&A side, have you seen any constraints on closing deals at the end because of hard scrutiny?

We have not seen constraints at all on closing deals. I'll point out, too, a couple of things. You know, we look for companies, not that we're competing against, but companies that will fill capability gaps. To help us become a stronger solutions integrator, and move up the value chain. We also try and get companies preemptively, so we try to avoid auction processes. We get companies that we've worked with for a long time, so we understand their culture, and we know that they're going to be a fit. One other item that I mentioned, unlike other companies, we don't build in synergies into our M&A case. So anytime we get cost or revenue synergies, those are additive to our M&A case. And then after we buy companies, it's key focus of us to be able to keep the leadership team. In fact, many of the folks on my executive leadership team today came from acquisitions.

Thanks so much. Thank you. Thanks, Mariana. That's all the time we have for questions today. I'd like to turn the call back to Dave Spilly for closing remarks.

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.

This concludes today's conference call.

Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you.

Thank you.

Good day and thank you for standing by.

Welcome to the second quarter 2023 Parsons Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, 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 2023 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 Kerry Smith, Chair, President, and CEO, and Matt Opelis, CFO. Today, Carrie will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our second 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 anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2022 and other SEC filings. 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 Parson's second quarter 2023 earnings call. I am very pleased with our results again this quarter. Our momentum continues as we delivered another record quarter with all-time highs for total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. In the second quarter, we achieved organic revenue growth of over 20% in both business segments and won six contracts over $100 million, all company records. Our record growth was driven by winning key contracts in both segments, ramping up new contract work, growing revenue on existing contracts, and record employee hiring and improved retention. In addition, our successful M&A program is contributing to growth by enhancing our ability to win large strategic contracts with differentiated technical solutions. I will also note that for Q2 and the first half of 2023, total adjusted EBITDA growth exceeded revenue growth. In the second quarter, total revenue increased 34%, while adjusted EBITDA grew by 53%. And for the first half of 2023, total revenue grew 29% and adjusted EBITDA increased 38%. Our ability to drive adjusted EBITDA growth faster than our strong revenue growth demonstrates our focus on margin expansion. We have the right portfolio and the right team to continue to capitalize on unprecedented global infrastructure spending and the increasing demand for national security solutions, especially in high-priority growth markets such as cyber and intelligence, space, electronic warfare, information operations, and artificial intelligence, all of which address near-peer threats. These positive factors provide us with the confidence and visibility to raise our full year revenue, adjusted EBITDA, and cash flow guidance, which Matt will discuss in a few minutes. During the second quarter, we achieved a book-to-bill ratio of 1.4 times on an enterprise basis. These results were driven by a 95% year-over-year increase in contract awards. This is now the 11th consecutive quarter in which critical infrastructure's book-to-bill ratio has exceeded 1.0 times. Our robust bookings and record year-to-date win rates were driven by delivering on our customers' missions moving up the value chain by offering higher-end capabilities, developing differentiated technology solutions, and hiring and retaining a prestigious workforce. We were awarded six contracts that exceeded $100 million during the second quarter and one more just after the quarter ended. These large contracts span both business segments and provide increased visibility to our financial outlook. Significant second quarter contract wins included the Federal Aviation Administration's $1.8 billion ceiling value repeat contract to support their aviation system capital investment plan, of which we booked a three-year base period for $641 million. Parsons has been the prime contractor on this work for more than two decades, and we look forward to continuing to support this important customer. With the Infrastructure Investment and Jobs Act, the FAA has $5 billion of additional funding for facilities-related work. Also with this FAA win, we've secured all four of our major repeats of approximately $2 billion each, and these contracts span the next seven to 20 years. We were awarded a new five-year single award contract from the General Services Administration with a potential value of $1.2 billion, of which we booked the one year base period for $217 million. This contract supports the Department of Defense and its strategic partners in delivering global quick reaction capabilities, leveraging advanced technology solutions across the all domain battle space. We won a $170 million task order contract by the Defense Threat Reduction Agency under the assessments, exercises, modeling, and simulation support IDIQ vehicle. This contract contains new and existing work to provide vulnerability assessments, design reviews, and analysis that advances the Department of Defense and Defense Threat Reduction Agency's missions to counter and mitigate a broad spectrum of existing and emerging vulnerabilities and threats. We booked $34 million on this contract in the second quarter. We were awarded a new $130 million single award contract as lead designer for the Port Authority of New York and New Jersey to enhance infrastructure at the John F. Kennedy International Airport. The scope includes a new on-airport roadway transportation network, parking garage, pedestrian bridge, and utility upgrades. We booked this entire contract value in the second quarter. We were also awarded a new $127 million contract as subcontractor to a federal customer of which Parsons booked $25 million to deliver detection technology solutions. We were awarded a $109 million repeat contract from the United States Cyber Command to provide cyber capability, discovery, development, testing, and advanced analytics. We booked $52 million on this contract in the second quarter. This is our second consecutive win with the Cyber Command this year, and we're excited about our position supporting this critical customer's mission. Cyber Command is now gaining budget authority in recognition of their importance to national security. In addition to the six wins greater than $100 million each, we were awarded a new $93 million single award contract to complete project and design management for a major development in Saudi Arabia. We booked the entire value of this contract in the second quarter. And shortly after the quarter ended, the NASA Repairs, Operations, Maintenance, and Engineering contract was awarded to our prime contractor. Parsons' work share is $130 million. During the second quarter, we also closed on our acquisition of IP Keys Power Partners. This strategic acquisition expands Parsons' presence in two rapidly growing end markets. grid modernization, and cyber resiliency for critical infrastructure. IPKeys enables Parsons to bring cybersecurity tools, technology, and market experience to utility operators to secure operations, optimize efficiency, and achieve grid resiliency. I'm very pleased with our M&A program, especially with the strong execution of our recent XTOR acquisition. Our acquisitions have enabled us to prime and win large contracts. Our strategic and selective approach to acquisitions has enabled us to move up the value chain and create differentiated positions in our six core end markets. We have an active M&A pipeline across both segments, and we will continue to use our strong balance sheet to complete additional accretive acquisitions that drive growth and margin expansion into our business. As part of our long-standing commitment to ESG, in April we released our 2023 ESG report detailing how we're making the world safer, healthier, and more sustainable. As part of this report, we announced that we already exceeded our 2025 target to reduce Scope 1 and 2 emissions by 20%. As a result, we published our commitment to set updated near and long-term targets for greenhouse gas emission reductions aligned with science-based target initiatives. During the quarter, we were recognized as a top employer for diversity by distinguished organizations, including Forbes, Women Engineering Magazine, and the Washington Business Journal. In addition, we were recognized by VETS indexes for our commitment to support veterans. As a result of our ESG commitment, we were upgraded by Institutional Shareholder Services, or ISS, to prime status. This label is awarded to companies for successfully managing sustainability-related risks and opportunities and achieving the best ESG scores among their peers. I'm also proud to share that Parsons was part of the team that helped the United States comply with the 1997 Chemical Weapons Convention Agreement by destroying our country's last chemical weapon. The final sarin nerve agent-filled M55 rocket was destroyed on July 7th I want to congratulate the hundreds of Parsons team members and the many partner personnel that supported this mission over the years, leading us to this monumental accomplishment. As a result of the major milestone achievement on this contract and one other chemical weapons destruction program this quarter, our federal solutions segment earned $20 million of one-time incentive fees, driving its adjusted EBITDA margin to over 11% for the quarter. Relative to our two legacy critical infrastructure programs, our margin was impacted by $28 million this quarter. While the write downs are disappointing, we've made significant progress on both programs, bringing them to over 95% and 75% complete, with final completion dates expected in early Q4 2023 and late 2024 respectively. For the program that ends in 2024, during the second quarter, we demonstrate important progress against technical requirements. In summary, we had an excellent second quarter. I'm extremely proud of the hard work and performance of our talented employees. They have consistently delivered strong results over the last two years. In the second quarter, we achieved record total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. We also reported a 1.4 times book-to-bill ratio by increasing contract awards by 95%. Additionally, we continued to execute on our strategic M&A program and plan to continue to leverage our balance sheet for additional accretive acquisitions. As I look forward, I'm extremely excited about our bright future. We are in six great markets with differentiated technology that are all simultaneously growing. We have an experienced management team that is delivering strong results and promoting a people-first culture, which is enabling us to be one of the organic growth leaders in both of our business segments. With that, I'll turn the call over to Matt to discuss our second quarter financial highlights. Matt?

Thank you, Kerry. As Kerry indicated, our second quarter was highlighted by record results in a number of areas, including total revenue, organic revenue growth, adjusted EBITDA, contract awards, and total backlog. Total revenue of $1.4 billion for the second quarter of 2023 increased 34% from the prior year period and was up 23% on an organic basis. Organic growth was driven by the ramp up of recent contract wins and growth on existing contracts. In the second quarter, our acquisitions contributed approximately $121 million of inorganic growth. As a reminder, our Exitor acquisition closed at the end of May 2022, so only June 2023 results are reflected in our second quarter organic growth. SG&A expenses for the second quarter were 16% of total revenue, compared to 20% in the second quarter of 2022, due to a continued focus on efficient growth across the portfolio. Adjusted EBITDA of $118 million increased 53% from the second quarter of 2022. This increase was driven primarily by volume on new contract wins and the incentive fees from the chemical weapons destruction programs, as well as contributions from our Exitor acquisition. The year-over-year 100 basis point margin improvement to 8.7% was driven by recent contract awards, our Exitor acquisition, and operating leverage. I'll turn now to our operating segments, starting first with Federal Solutions, where second quarter revenue increased by $225 million, or 42% from the second quarter of 2022. This increase was driven by organic growth of 20% and $118 million from Exitor. Organic growth was driven primarily by expansion with the Department of State, growth on new existing contracts, and the incentive fees previously discussed. Federal Solutions adjusted EBITDA increased by $38 million, or 80%, from the second quarter of 2022, and adjusted EBITDA margin increased 230 basis points to 11.2%. These increases were driven primarily by the $20 million non-recurring incentive fees and contributions from Exitor. Moving now to our critical infrastructure segment. Second quarter revenue increased by $123 million, or 26%, from the second quarter of 2022. This increase was driven by organic growth of 25% and $3 million from our IP Keys acquisition. Organic growth was driven by higher volume in both the Middle East and North America. Critical infrastructure adjusted EBITDA increased by $3 million, or 10% from the second quarter of 2022. Adjusted EBITDA margin decreased 80 basis points to 5.5%. The adjusted EBITDA increase was driven by higher volume on new and existing contracts, The stronger core margin was impacted by $28 million of write-downs on two legacy programs. Notwithstanding, we continue to see margin expansion within critical infrastructure, excluding impacts from the two legacy programs. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q2 2023 was 76 days, up four days from the prior year period. During the second quarter of 2023, we generated $23 million of operating cash flow compared to $51 million in the prior year period. The decrease was driven by timing of collections on a few large receipts, which were collected early in Q3. Additionally, working capital was consumed to support the strong growth in the quarter as new programs ramped up. Consistent with typical seasonality patterns, we expect cash flow to be strong in the second half of the year to get us to the midpoint of our increased guidance for 2023. Capital expenditures totaled $10 million in the second quarter of 2023, which is relatively consistent with the prior year period. CapEx continues to be well-controlled and remains in line with our planned spend of approximately 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of less than 1.4 times after the $43 million all-cash IP Keys acquisition, which closed in April. Our low leverage, strong free cash flow outlook, and undrawn borrowing capacity enable us to continue to make internal investments and accretive acquisitions to support long-term growth. Turning to bookings for the second quarter, year-over-year contract award activity increased 95% to $1.9 billion, which is the highest in our company's history. The strong bookings performance was driven by a 201% increase in our federal solutions segment and a 25% increase in critical infrastructure. Our book-to-bill ratio for the second quarter was 1.4 times with federal solutions at 1.5 and critical infrastructure at 1.3. On a trailing 12-month basis, our book-to-bill ratio remains a healthy 1.2 times, with critical infrastructure at 1.2 and federal solutions at 1.1. Our record backlog at the end of the second quarter totaled $8.9 billion, up $674 million, or 8% from the second quarter of 2022. Now I'll turn to our guidance. We're increasing all of our 2023 guidance ranges provided on May 3rd to reflect our record second quarter results, recent large contract wins, hiring and retention momentum, positive end market exposure, and our outlook for the remainder of the year. For 2023, we're increasing our revenue range by $350 million to $4.85 to $5.05 billion. This represents total revenue growth of 18% at the midpoint and 12% on an organic basis. Additionally, we're increasing our adjusted EBITDA range. We now expect adjusted EBITDA to be between $410 and $440 million, which represents 20% growth at the midpoint of the range. Margin at the midpoint of our revenue and adjusted EBITDA ranges remains at 8.6%. We are also increasing our cash flow guidance. We now expect operating cash flow to be between $280 and $340 million, representing 31% growth at the midpoint. Free cash flow conversion is expected to remain around 100% adjusted net income. Our updated guidance represents 8% of additional revenue and adjusted EBITDA growth at the midpoint of our ranges. These increases reflect greater visibility into customer demand, funding on new programs, and higher confidence in the staffing and retention estimates. Other key assumptions in connection with our 2023 guidance are outlined on slide 11 in today's PowerPoint presentation located on our investor relations website. In summary, we delivered record first and second quarter financial results. Through the first half of the year, we've achieved revenue growth of 29% and adjusted EBITDA growth of 38%. We're confident in our ability to achieve our increased 2023 guidance as a result of record total backlog, continued hiring and retention momentum, strong global infrastructure spend, and new award activity in our federal solutions portfolio. With that, I'll turn the call back over to Carrie.

Thank you, Matt. I'm very pleased with the performance of our company over the last two years. We continue to be one of the top leaders in organic revenue growth in both of our segments. Given our strong awards, revenue, and adjusted EBITDA performance, we are raising guidance for all three of our financial metrics. Looking forward, we have a company with a unique portfolio that is well positioned in two complementary business segments. All six of our end markets are growing, and we continue to win new business in each of them with company record win rates. As a destination employer, we're exceeding hiring and retention goals as employees seek to work for a firm that combines value-driven mission with an entrepreneurial culture. Our M&A program continues to be successful, and the companies that have joined the Parsons family have strengthened our technical differentiation and moved us up the value chain. Thank you to all the Parsons employees for their dedication and support of our customers' missions. With that, we will now open the line for questions.

As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Toby Sommer with Truist Securities.

Thank you. Can you hear me?

Yes. Morning, Toby. Hey, Toby. Thanks. Good morning. I was wondering if you could describe the factors that would explain what looks like, by my math at least, sequential top-line declines implied in guidance in 3Q and 4Q. Is there something seasonal or some work that was completed in the quarter that would help us understand that?

Yeah, Toby, so if we're looking at the second half specifically, we've talked a little bit in prior calls about some headwinds related to Kwajalein, specifically that program completed that peaked in Q3 of last year, so that's a bit of an impact. We also, to your point, have seasonality through the summer months. Obviously, a good portion of our growth has been driven by Middle East and some of the Department of State work, so we have some summer months where the seasonality adjusts a little bit. And then obviously the Q4, we have a little bit of budget uncertainty. If things go well and we continue down the hiring trends, we'll kind of trend toward the high end. But right now, the midpoint, we're pretty comfortable.

Okay. And then from a modeling perspective, as we look into 2024, does the non-recurring fee that you described in the third quarter, Does that provide a real significant headwind to EBITDA growth next year?

No, we don't believe it does, Toby. We're still on track with our long-range targets that we provided at the investor day.

Yeah, so Toby, I would say if you think about the federal and CI businesses, as we've mentioned before, federal, we typically are in the high eights, low nines from a margin perspective. Our goal by 2025 is to get the CI business over 9%. So I'd say, you know, somewhere in those ranges is a fair number.

Okay. And last one for me, if I could. What does the cadence of re-competes look like over the next couple years, having recently kind of won and retired some pretty significant re-compete risk?

Yes, Toby, for the rest of this year, it's 1%, and for next year, it's 9%. We're very proud of the fact that we won all four of four major repeats and particularly pleased with the duration of those programs spanning 7 to 20 years. Thank you very much.

Thank you.

Our next question comes from the line of Burt Subin with Stiefel.

Hey, good morning, and congrats on the strong results in the quarter. Thank you, Bert. Thanks, Bert. Matt, maybe just to follow up to your comments there to Toby, you know, absent the project write-downs in the quarter, I think your CI adjusted EBITDA margin would have been over 10%, something like 10.3%, which would imply you're already outpacing that 9-plus percent CI margin target. So is that just a one-time thing? Was there something, I guess, beneficial in the quarter outside of the headwind you had from the $28 million project right now?

Yeah, I would say, you know, I think to your point, Bert, we're starting to see the core business within CI is executing. As Kerry mentioned, we have that one program wrapping up in early Q4. It's kind of slipped into October within the quarter. And then the second one will be middle of next year. So, again, it's the core business is executing where we expect it to be longer term. it's really kind of getting through these challenge programs. So again, we feel comfortable with targeting CI in the low nines over the next couple years.

Yeah, just to add to that, so as you mentioned, we were about 10.2 pro forma for the quarter for CI margins. For the first half of the year, we would have been an 8.7 pro forma. We are fortunate one of these programs is very close to wrapping up. In fact, we're in the final punch list stage for that. That'll complete in Q4, early Q4 of this year. And the second program, we had terrific results this quarter in terms of demonstrating some key technical requirements, which gives us confidence in the end of 2024 date.

Got it. Maybe more like a high-level question for you, Carrie. You know, if I look at the recent success, you know, you've won a ton of contracts on the FS side, a lot of success in CI, both in North America and the Middle East. It's created a, you know, a pretty impressive organic growth setup. I think the main risks to that were hiring around some of the new contract wins on FS, particularly things that involve fiber classified work, and then these legacy projects. How should we think about, I guess, both going forward on the hiring front? You know, do you see a pretty good path to hiring, you know, those classified and cleared individuals? And then on the legacy projects, are you pretty comfortable this is you know, sort of the last write-down related to these projects?

So I'll take your last part first. On the legacy projects, we obviously can't predict unknown unknowns, but as of this point, you know, we've guided to where we think we are at the end of this quarter. And again, both programs are demonstrating completion progress and nearing the end, one at 95% complete, one at 75% complete. On the hiring, we've been doing a great job across the board. We have increased net headcount in all four of our business units, including the cleared segment. We've also done a terrific job on retention. And year over year, our retention improved by 2%. So our HR department and all of our business units have been doing a great job of attracting and keeping quality people within Parsons.

Great. Thanks, Carrie. And just one final question. Can you give us any update on how you're thinking about PFAS, PFAS? I know that had the potential to be a tailwind. Do you think that's, you know, being moved up to 23, or is that still more of a 2024 story? Thank you.

Yes, we're starting to see more demand for PFAS, PFAS, as you've seen in the news with particularly some of the industrial and manufacturing companies. When we look at the addressable market for that, it's about a $200 billion addressable market out of which persons, services, service addressable market is around $45 billion. So we're involved mostly today still in the investigations, and then we'll get more involved in remediations as time goes on. With the increasing standards that are being put in place by the government, we expect to see that accelerate as we look over the next couple of years.

Great. Thank you, Karen. Thanks, Matt.

Thanks, Bert.

Our next question comes from the line of Sheila Kailou with Jefferies.

Good morning, guys. Thank you so much.

So I just wanted to ask on the top line first off, like great quarter on every single metric possible. So if you could just talk about what's going on with the top line, great organic growth of 23%. Are you guys changing the way you win business? How much of it is coming from your addressable market getting bigger? It seems like CI has some major tailwinds as well, but you guys are also doing the right thing. So if you could talk about just your updated guidance, how much of it was tied to new awards versus on-contract growth versus hiring coming in better, and then I'll have a follow-up.

Yeah, Sheila, good morning. So we're very pleased, and I'd say all four of the business units and all six of our end markets have been hitting on all cylinders today. What we've done, probably if there's one change, we've moved up the value chain as a result of inorganic investment and then organic M&A. So being able to string together capabilities end-to-end has allowed us to win significant jobs like the $1.2 billion GSA job that we were awarded. We're also very selective on what we bid, and we've delivered extremely high win rates record for the company at 72% year-to-date. Addressable market, again, it's really back to our six core markets. We're in cyber and intelligence, space and missile defense, transportation, environmental remediation, urban development, and critical infrastructure. And we're at a fortunate time that all of the compound annual growth rates are increasing between 5 to 12 percent. So all we have to do is really stay laser focused on the six markets the customers that we have, the capabilities that we deliver, and continue to move up that value chain and bid and win bigger programs. This year, year-to-date, we've won 10 jobs greater than $100 million. That compares with 11 for the full year last year, so we're in a very strong trajectory. We've seen both new business wins as well as on-contract growth across the board. And hiring is, again, it's stronger this year than it was last year, which was already a very good year, and retention's improved by 2%.

Got it. No, that's super helpful. And then maybe you mentioned some of these already. So as we think about the second half, what really comes off on the organic decline would be, well, not organic decline, but only up 10 and up 6%. As we think about Q3 and Q4, how does the FAA contract ramp factor in there and then the GSA win as well?

Yes, so Matt mentioned earlier we have a headwind from Quadulin of about $55 million, and there's a couple of small contract completions. We have factored in government budget uncertainty, particularly on the federal side, and we do have tougher comparables. FAA, to your point, does have seasonality that's positive that we factored in increasing for the second half.

Great. Thank you.

Thank you.

Our next question comes from the line of Kai Von Rumer with TD Cowan.

Thank you very much. So, wow, great quarter.

Congratulations, really. Thank you, Kai. Could you maybe help us kind of reset, you know, given the numbers were so big, where you expect to be at your midpoint at both Fed systems and critical infrastructure?

Yeah, so for the total year, we expect to have 18% growth and 12% organic. And Matt, you want to share the federal? Yeah, so for the... 54% federal business and 46% CI.

Okay, that's very helpful. And then, so it seems maybe too much to ask, but... you know, what do the bookings look like in the third quarter? Because seasonally this is pretty good for the defense IT sector, and I think your historicals are from the Q3 a 1.3, and you've been over one in every year since 2017. So what are we looking for for bookings in both sectors in the third quarter?

So what we've planned for the rest of the year would be just slightly below a 1-0. We do typically, to your point, in the third quarter see very strong federal bookings. And again, if the critical infrastructure volume continues based on global infrastructure spend, that should already remain strong. I did point out earlier we've won 10 contracts greater than $100 million year-to-date, and we already won one of those in the third quarter that we've announced. That was the NASA Rome contract for $130 million. Got it.

And then, so you've raised your adjusted EBITDA significantly. You only increased the cash flow by $5 million. Maybe it's kind of a picky question, but how come not more?

Yeah, good question. I obviously, I think through the first half, we're a little bit, um, you know, behind, I guess I would say from where we had planned, uh, we mentioned, I mentioned on the script that we were, um, you know, we had a couple very large links that were collected early in the third quarter. Um, you know, we're probably, you know, the high end is, is, is kind of what we're hoping for, but, you know, given some of the uncertainty, obviously 35% growth in the middle East year to date, there's a little bit more uncertainty around the middle East billings and collections. So I'd say if things go well, we do have to do almost $300 million in cash in the second half. So it's just kind of coming up with an estimate that we're confident in.

Terrific. And last one, given how fast you're growing, what's your appetite for M&A? I mean, You know, you're growing so fast organically. Can you basically deliver on that? As well as do acquisitions, are you basically cooling it for the moment on acquisitions?

We still intend to do acquisitions. We really believe that's been a critical part of our growth story, moving us up the value chain as a solutions integrator, being able to bid and win larger jobs. So we plan to continue. We'll keep the same high bar So we need to look at companies that are growing greater than 10% top line, have greater than 10% EBITDA margin. We're going to continue to be very selective. You know, I think if you look at Exator being the most recent acquisition and what they've been able to deliver, it's going to be companies like that that are really going to be able to contribute to our growth and couple into our capabilities and make us stronger to be able to win more businesses. On the federal side, we're going to look at companies in the area of cyber and space, and particularly around areas like defensive cyber or critical infrastructure protection. On the critical infrastructure side, we're also going to look at areas of geographies, because if you look at how the infrastructure spend is, the larger states are getting more of the money, so you can expect to see us double down there.

Thank you very much. Thanks, Kai.

Our next question comes from the line of Andrew Whitman with Baird.

Excuse me. Thanks for taking my question. I guess your success in the federal awards front this year, not only with the re-competes but with just kind of broadly with the awards is obviously notable here. I was just wondering in terms of the level of outstanding bids that you have not heard back on yet. How does that compare with earlier in the year, and does any of the uncertainty in the appropriations process that's coming this summer-fall, how does that affect the bidding velocity or the bidding pace that's happening right now, Carrie?

Yeah, thanks, Andrew.

So we have $7 billion awaiting notice of award, which is a little lighter than last quarter because we did win so much. I would also point out, though, we have over $12 billion of what I call unbooked ceiling value. So if you look at the way, again, that we do bookings and take, for example, the FAA contract. That was a $1.8 billion award, of which we booked $641 million. So the rest of that you don't see reflected in our backlog or bookings. It's in that $12 billion of unbooked value. If you look at the appropriations process, we've gotten very used to dealing with uncertain budget environments, unfortunately, with continuing resolutions. And we're able to run through those, both based on that $12 billion of unbooked value. We've got, obviously, a very strong $8.9 billion record backlog. And then 50% of our business is not subject to the CR process, if you look at the amount that we have that's international, state, local, and commercial. So we feel confident we'll be able to run for a while.

And, Andy, I'd just add to your point, you know, that $7 billion of awaiting notice of award, if we look back a couple years, that's almost two times what our run rate was a couple years ago. So, there's still a backlog there, but it's kind of trending in the right direction recently.

And, Andy, we also have a $45 billion pipeline.

Great. Those are all the numbers I wanted. I guess just I think you had a quick comment. Maybe I missed it on win rates. Carrie, can you just kind of maybe elaborate on kind of what you've seen? I know it's been a good year to date. Is there any reason to believe that you've been doing better than expected or worse than expected, or there should be any change in the win rates that you've experienced?

Yeah, we've been doing very well year to date. I mean, I will say if I look back over the last three years, almost consistently every year we've improved sort of by 10% over the last couple of years. This year, we're way up at 72%. And again, I think it goes back to our bidding process. It's being very selective. It's moving up the value chain and positioning early, working with customers. And a key point about our business is we look for emerging customer requirements. So we're not a company that's coming in and always trying to take somebody else's market share, but rather, how do we solve the problems of the future, like the near pair threat problems? or how do you solve digital transformation within infrastructure? And I think that's a key contributor to our success.

Great. Thank you very much. Have a good day.

Thanks, Andy. Our next question comes from the line of Josh Sullivan with the Benchmark Company.

Hey, good morning. Great quarter.

Good morning.

Thank you, Josh. Just following up on that $12 billion of unbooked value, the international piece, how do we think of the Middle Eastern contract staging or cadence looking ahead? Any large pulls in the tent over the next 12 months?

Yes, so on the Middle East works, we've been successful to get on five of five of the GIGA projects, and those are going to continue to grow as they ramp up. The two biggest ones for us would be NEON, the line, and also at NEON would be OXYGON projects. And Cadilla, so knee on the line being the city that's as tall as Empire State Building, as long as Long Island. Their goal is to have 9 million people living there by 2030. Totally sustainable city. And then Cadilla being the largest entertainment city in the world, just outside of Rio. And we're the delivery partner on both of those projects. So I would say those are going to continue to see a ramp. And they have kind of a long tail because that vision runs to 2030. Then outside of Saudi and Dubai and Qatar, you're seeing investment as well. So they have like the projects of the 50 and the UAE that's been defined. There's the Qatar National Vision. So those are strong.

Got it.

And then as far as the sunsetting legacy programs, are there any terminal costs we should think about outside of the write-downs?

No, nothing specific, Josh. But it's just kind of wrapping them up and completing them within the CARNI ACs.

Got it. And then just lastly, hiring and retention. You know, what are you seeing generally in the labor markets as far as wage inflation or availability and retention rates?

Yeah, so we see it's down a little bit from last year. And we're, again, great on retention. We've seen 2% drop year over year is a very big improvement. I'll credit that to our culture, though. I think people come to Parsons, and they really like Parsons. We're a big company, but we act like a small company in terms of our agility, our flexibility. It's kind of a supportive culture, and I think it's just a great place to be. So I believe that's why we're attracting more than kind of our fair share of talent.

Great. Thank you for the time.

Thank you.

Thanks. Our next question comes from the line of Louis de Palma with William Blair.

Carrie, Matt, and Dave, good morning.

Good morning, Lloyd.

It seems that your recent $750 million State Department contract win was for Exitor and the $1.2 billion GSA award seems related to your your black horse acquisition and I was wondering does this encourage Parsons to be more active on the M&A front as your current formula seems to be highly effective right now and on this topic what is the state of the M&A pipeline for you as you've done a fairly significant acquisition every year I think for the past four years but It's just been IP keys this year. So I was just wondering how you feel about the M&A market. Thanks.

Yeah, thanks, Lou. And I'd say M&A is a critical contributor to what we've seen in our growth. Our ability to buy the right companies, to integrate the companies, to retain the leadership and the people has been very important to our success. To your point, the Department of State work growth has been from Exotor. The GSA win was led by Blackhorse, but it included almost all the companies that we've bought. I mean, it was Legacy, Polaris Alpha, OG Systems, Braxton, QRC, Legacy Parsons. And that win, I would say, was really the culmination of all those acquisitions, the ability to quickly integrate, and the ability to go after work that is emerging customer requirements. We still see a very good pipeline on both the federal and the critical infrastructure side. We look at companies every week. We're going to continue to be very selective so that we're buying the companies that enable the growth that we've been delivering.

Great. Thanks, Carrie. And as it relates to the Middle East, how has the labor market been specific to that geography, you reported very strong revenue growth. Is Parsons able to hire enough to keep up with the demand in that region?

Yeah, thanks, Louie. The labor market there has been very good. We hire from about 40 different countries around the world, so we have quite a bit of pull. And the type of projects that we're doing there are first of a kind, one of a kind. So people want to be involved in these because they're so unique. And compared, like, to other countries, they're really in a greenfield stage. So if you're an engineer, there's nothing more exciting than being able to go work on a project like NEOM or CADIA that you may never see in the rest of your career.

Excellent. Thanks, Carrie, Matt, and Dave.

Thanks, Zoe.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from Mariana Perez-Mora with Bank of America.

Good morning, everyone.

Good morning. My question is, you're expecting 12% organic growth this year. That's what, like three, four times the three-year CAGR you expected. And with just this year, you almost accomplished the lower end of that guidance first. how should we think about the future and like organic growth into the next two years? And second, it's like, what are the variables that, I don't know, keep you up at night and, I don't know, put you in a place to still build some conservatism in the future?

Thanks, Mariana. Great question. We've had a lot of success and upside to our financial targets, as you point out, during the first half of the year. We've won a significant amount of work We do plan to update our three-year financial targets as a result, and you'll hear from us in either Q3 or Q4 for an update. But for now, from a modeling perspective, I would start with the updated guidance midpoint of $4.95 billion and put our investor day total revenue targets of mid-single growth on top of that higher base. And then your second part of your question was what part keeps you up Oh, headwinds. I would say any of the macroenvironment issues, you know, everything within our control I feel comfortable about, so the question is, you know, do we end up with a longer-than-a-year CR? We talked about Kwajalein earlier being a headwind in the second half of the year. Does hiring or retention become more difficult? Right now we're not seeing those, but those would be the ones that we would keep an eye on.

Perfect. Thank you. And then on the M&A side, have you seen any constraints on closing deals at the end because of hard scrutiny?

We have not seen constraints at all on closing deals. I'll point out, too, a couple of things. You know, we look for companies, not that we're competing against, but companies that will fill capability gaps. To help us become a stronger solutions integrator, and move up the value chain. We also try and get companies preemptively, so we try to avoid auction processes. We get companies that we've worked with for a long time, so we understand their culture and we know that they're going to be a fit. One other item I mentioned, unlike other companies, we don't build in synergies into our M&A case. So anytime we get cost or revenue synergies, those are additive to our M&A case. And then after we buy companies, it's key focus of us to be able to keep the leadership team. In fact, many of the folks on my executive leadership team today came from acquisitions.

Thanks so much. Thank you. Thanks, Mariana. That's all the time we have for questions today. I'd like to turn the call back to Dave Spilly for closing remarks.

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.

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