Parsons Corp Aktie

Good day, and thank you for standing by. Welcome to the Parsons Corporation Third Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I will now hand the conference over to your speaker host Dave Spille, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss 2026 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. Joining me on today's call are Carrie Smith, Chair President and CEO and Matt Opolos, CFO; and George Ball, our former CFO and a current member of our Board of Directors. .

Today, Cary will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results, as well as a review of our 2026 guidance. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors described in our Form 10-K for fiscal year ended December and other SEC filings.

Please also refer to our earnings press release and presentation slides for additional forward-looking statement disclosures. 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 their comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. I now will turn the call over to Carey.

Thank you, Dave, and welcome to Parson's Third Quarter 2026 Earnings Call. I'd like to begin by recognizing persons more than [ 21,000 ] employees for their dedication and professionalism. Their continued focus on our customers' missions enabled us to deliver results that exceeded our third quarter commitments.

We also remain deeply focused on the safety and security of our 8,000 employees across the Middle East. Their resilience and commitment have allowed us to maintain strong execution across the region and continue delivering for our customers.

This quarter, we delivered on our financial and strategic objectives through disciplined execution. Revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow all exceeded our commitments.

Demand remained healthy across both Federal Solutions and Critical infrastructure despite a challenging macroeconomic backdrop. TD's results, combined with our strong bookings, a growing backlog and robust pipeline demonstrate the resilience of our portfolio and provide a solid foundation for enduring organic growth.

Building on this momentum, we continue to advance our strategic portfolio initiatives and drive operational excellence. We cited a definitive purchase agreement for the divestiture of our remote location contracts and are finalizing approval of the related contract novation.

This transaction further derisks our portfolio and enables us to focus our resources on higher growth, higher-margin opportunities. Our critical structure joint venture program is now more than 75% complete. We expect to reach over 80% by year-end and 85% at the end of the first quarter of 2027. We've increased executive oversight, strength and review frequency and initiated critical testing and commissioning activities to manage remaining cost and schedule risk.

While the project remains exposed to factors outside of our control census weather, potential contract modifications and being the non-managing joint venture partner, we remain focused on disciplined execution in line with our current estimates.

As a reminder, we have not pursued similar consortium projects since 2019. Before we review our financial and operational highlights for the quarter, I want to address the leadership transition we announced earlier today.

As noted in our 8-K filing, Matt Atlas has decided to step down as Chief Financial Officer to pursue a new professional opportunity. On behalf of the Board and the entire Parson's team, I want to thank Matt for his dedicated leadership and financial stewardship over the past years. We wish him the best in his next chapter.

To ensure a seamless transition, George Ball will be stepping into the interim CFO role effective November George brings decades of experience with Parsons Corporation, including years as the Parsons CFO.

Since retiring, George has been serving on our Board of Directors and has deep familiarity with the company, immediate operational readiness and our proven track record. George's extensive experience and thorough institutional knowledge will ensure continuity and a seamless transition during this period.

Turning to our third quarter financial results. Total revenue increased 2% year-over-year. Excluding our confidential contract, revenue increased with 2% organic growth.

Adjusted EBITDA increased 6% and adjusted EBITDA margin expanded 40 basis points to 10.2%, a company record.

Operating cash flow was $269 million, significantly exceeding our commitments. Critical infrastructure delivered record third quarter revenue and adjusted EBITDA margin, which exceeded 11% for the first time.

Bookings were also strong. Total contract awards increased 14% year-over-year, resulting in a consolidated book-to-bill ratio of 1.1x. Federal Solutions was particularly strong, with awards increasing 53% year-over-year and a book-to-bill ratio of 1.2x.

Critical Infrastructure delivered a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above that level. Through the first 9 months of 2026, Federal Solutions bookings increased 47% year-over-year, while credit card structure achieved a year-to-date book-to-bill ratio of 1.1x.

As a result, consolidated year-to-date book-to-bill was 1.2x. The quality and strategic importance in these awards were equally encouraging. During the quarter, we received contract actions valued at more than $100 million each and continue to expand our use of other transaction agreements or OTAs. We won a $495 million ceiling value contract for a national security customer to acquire and deploy advanced communications, power and software capabilities.

We booked $37 million on this contract in the third quarter. One of the quarter's most significant awards was the increase of the ceiling value of our 5-year sole source other transaction production contract with United States Cyber Command of $750 million.

We secured this contract through our acquisition of Sealing tech and have now begun full rate production of the Joint Cyber Hike or JCHK. JCHK is a modular mobile cybersecurity system that enables joint cyber protection teams to rapidly detect, analyze and counter advanced cyber threats across the United States and Allied Networks.

To date, we've booked $250 million under this contract including JCHK. Parsons now generates approximately $350 million annually in products and related service revenue, and we plan to continue to expand this portfolio across 6 product families. Biometrics and identity management, full spectrum warfare, command control emission planning, autonomy and counter An aircraft systems, space mission systems and infrastructure operations and resilience.

In addition, this quarter, we booked $234 million of the $514 million, 2-year option period for the Missile Defense Agency's Teams next program. Under this program, we will continue providing engineering, technical, analytical and oversight support for the nation's integrated missile defense system, including efforts to address evolving ballistic missiles and hypersonic threats.

We also won 4 new OTA awards with an aggregate ceiling value of more than $370 million and booked approximately $140 million under these agreements during the quarter.

These awards include a 5-year $97 million OTA by a government customer to deliver technology to simulate radio frequency and cyber conditions. The company booked $4 million on this agreement during the quarter.

We also received a 5-year $95 million other transaction agreement from a government customer to modernize software supporting early warning capabilities, and we booked $19 million in this agreement during the quarter.

In addition, we were awarded a classified 3-year agreement with a $95 million ceiling to provide advanced national security solution, supporting operations in the Pacific theater. We've got $30 million on this agreement in Q3.

We won a 75-month $86 million agreement to provide program and construction management support for the United States Base Command's new headquarters at Redstone Arsenal in Alabama. We booked the full value of this agreement.

Collectively, these wins expand our presence across several strategic growth markets. The United States Space Command award also demonstrates the synergies between our Federal Solutions and Critical Infrastructure segments and highlights our continued growth in defense infrastructure.

OTAs provide customers with a flexible path from technology development and prototyping through production and deployment. They're particularly well suited their critical missions such as cyber, countermand aircraft systems, electronic warfare and space and missile defense. We currently have 26 OTA contracts, including 12 awarded this year, representing $1.6 billion in total ceiling value.

Our OTA pipeline totals approximately $2 billion, positioning us to continue expanding this important contracting vehicle. Today's defense environment is faster, more distributed, more contested and increasingly multi-domain.

Meeting these challenges require solutions that are high-performing, affordable, rapidly deployable and scalable for sustained operations.

Our purpose-built Federal Solutions portfolio is differentiated by the combination of speed, agility, affordability and mission reliability. We bring together proven hardware, mission software and secure deployment to deliver integrated systems that create measurable advantages for our customers.

The administration's proposed FY '27 base defense budget of $1.15 trillion represents an increase of more than 28% over fiscal year '26 and aligns closely with Parsons differentiated capabilities and customer relationships.

While the proposed budget remains subject to congressional approval and appropriations, its focus on missile defense, cyber, space, electronic warfare and industrial-based modernization reinforces our confidence in the long-term demand environment.

With strong bookings and a strong pipeline, we believe Parsons is well positioned to support national security priorities and deliver capabilities at the speed and agility required by the Department of War. Funding decisions, protests and procurement may affect revenue conversion, but we view those as timing considerations rather than indicators of demand.

We also expect growth as existing vehicles are funded and has classified capabilities, recently awarded programs and new products ramp.

The same principles extend across critical infrastructure. Infrastructure owners are seeking assets that are more resilient, connected and intelligent and they need partners who can help them navigate the full life cycle from planning and design through construction, operations and optimization.

Parsons combines deep infrastructure expertise with digital engineering, data analytics, and secure technology to transform complex systems into higher performing, more resilient assets.

By connecting physical infrastructure with digital intelligence, we hope customers make better decisions, improve performance and create measurable value. Demand remains healthy across our credit infrastructure segment in both North America and the Middle East and this is reflected in the segment's 24th consecutive quarter with a book-to-bill ratio of at least 1.0x.

In North America, demand remains strong across transportation, environmental and water and wastewater projects. Only 48% of the infrastructure investment in Jobs Act funding has been spent as of August 2026 and the proposed Build America 250 Act would authorize at least $580 billion of surface transportation funding through 2031, if enacted.

This includes historic bridge investments, permitting reforms and increased formula-based funding to 90%. The Middle East also remains a resilient and attractive long-term growth market, supported by investment in transportation, urban development, aviation modernization, major regional events and broader economic transformation.

We also see emerging opportunities in the Middle East and countermand air system, cyber defense, integrated era missile defense, desalination and the protection of critical infrastructure.

Our Middle East net headcount has increased every month in 2026. These trends reflect our continued investment in the region, the strength of our brand and our confidence and long-term growth prospects.

While the infrastructure market remains attractive, recent growth has been moderated due to lower pass-through revenue in North America and broader geopolitical uncertainty.

In summary, we believe the third quarter demonstrated the strength and differentiation of our portfolio. We exceeded our commitments for revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow while strong book-to-bill ratios and healthy demand reinforced the resilience of both segments.

Combined with our greater than $50 billion pipeline, strong win rates, total backlog of $9.4 billion, of which 73% is funded and $12 billion of awarded contracts not yet booked. We believe these results provide us with a solid foundation for attractive long-term organic growth and value creation for our shareholders. With that, I'll turn the call over to Matt to provide more details on our third quarter financial results. Matt?

Thank you, Carey. Serving as a Parsons CFO under her leadership has been an incredible privilege. I'm proud of all that our team has accomplished and have tremendous confidence in the company's future. I'll remain a committed part on supporter for years to come. With that, let me get into the details of the Q3 results. .

Third quarter was highlighted by exceeding our prior commitments and delivering solid performance across the company. We will continue to focus on disciplined execution to drive long-term growth and shareholder value.

With book-to-bill ratios at or above 1.0x in both segments for the third consecutive quarter, revenue growth of 5%, excluding the confidential contract, a record third quarter adjusted EBITDA margin of 10.2% and operating cash flow of $269 million. We believe the strength of the portfolio will continue to drive long-term growth and margin expansion.

Turning to the details of our third quarter results. Total revenue grew 5% and 2% on an organic basis, excluding the confidential contract. These increases were driven by growth in our cyber and electronic warfare and transportation markets.

Highlights included strong growth on new and existing contracts to include JCHK, classified identity management contract and our FAA work.

Total revenue, including the confidential contract increased 2% from the prior year period and was down 1% on an organic basis.

We anticipate accelerating Federal Solutions growth over the next several quarters, supported by strong book-to-bill ratios over the past 3 quarters and the expected resolution of over $850 million in contract wins that are currently under protest. SG&A expenses for the third quarter increased 10% from the prior year period, primarily driven by acquisitions and technology investments that are in line with expectations.

Record adjusted EBITDA of $168 million increased 6% from the prior year period. Adjusted EBITDA margin expanded 40 basis points to a record 10.2%. These increases were driven by accretive growth across both our Infrastructure and Federal segments. I'll now turn to our operating segments, beginning with critical infrastructure.

Record third quarter revenue of $846 million increased 2% year-over-year, driven by 1% organic growth and contributions from our Applied Sciences acquisition.

Organic growth includes strength in our transportation market and growth in the Middle East despite the ongoing geopolitical uncertainty. Adjusted EBITDA increased 9% year-over-year to $94 million, while adjusted EBITDA margin expanded 80 basis points to 11.1%.

Revenue, adjusted EBITDA and adjusted EBITDA margin all set new records for the segment reflecting the ramp-up of recent awards, contributions from accretive acquisitions and stronger program execution.

Moving to our Federal Solutions segment, where third quarter revenue, excluding the confidential contract increased 9% year-over-year and 3% on an organic basis. Growth was driven by strength across our cyber and electronic warfare and transportation markets. including the confidential contract, total segment revenue increased 2% year-over-year and declined 3% organically.

Federal Solutions adjusted EBITDA increased 2% year-over-year, while adjusted EBITDA margin remained unchanged at 9.2%. The increase in adjusted EBITDA was primarily driven by contributions from acquisitions and growth on accretive contracts.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3 was 70 days, 8 days above the prior year period, mainly due to the conclusion of our confidential contract in Q1 of 2026. Compared to Q2 2026, our DSO improved by 6 days on strong cash collections.

During Q3, we generated $269 million of operating cash flow compared with $163 million in the third quarter of 2025. On a trailing 12-month basis, we generated $490 million in operating cash flow an increase of 12% over the prior 12-month period.

These increases were driven primarily by strong collections across the entire portfolio. Capital expenditures totaled $18 million in the third quarter. Looking ahead from the fourth quarter, we expect CapEx to increase sequentially as we continue to invest in classified facilities and reach critical milestones related to enterprise systems upgrades that support Parsons long-term growth and enhanced efficiency across the business.

Trailing 12-month free cash flow conversion was 130%. Our balance sheet remains strong as we ended the third quarter with a net debt leverage ratio of 2.1x. During the third quarter, we repurchased 1.3 million shares for $60 million. Year-to-date, share repurchases have totaled $110 million, an increase of nearly 70% from the prior year period.

We have increased share repurchases given our view that the current stock price does not fully reflect Parsons long-term value. We also continue to invest organically to differentiate our capabilities and we'll selectively pursue accretive acquisitions that strengthen our win rates and ability to capture large programs through differentiated technology.

Turning next to bookings. We secured $1.8 billion in contract awards during the third quarter, an increase of 14% year-over-year. This resulted in a consolidated book-to-bill ratio of 1.1x for the quarter. Our book-to-bill ratio was 1.2x for the first 9 months of the year and 1.1x on a trailing 12-month basis, supporting our future growth outlook as recently awarded programs ramp.

Both segments delivered solid bookings. Critical Infrastructure achieved a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above 1.0. In Federal Solutions, contract awards increased 53% year-over-year resulting in a book-to-bill ratio of 1.2x for both the third quarter and on a trailing 12-month basis. At the end of the third quarter, total backlog reached a record $9.4 billion, up 6% year-over-year, while funded backlog was up 7% and reached a record $6.8 billion, representing 73% of total backlog funded.

Now let's turn to our guidance. Based on our year-to-date performance and enhanced operational visibility, we are narrowing our revenue and adjusted EBITDA guidance ranges provided on July 29. For fiscal year 2026, we now expect revenue in the range of $6.25 billion to $6.45 billion and adjusted EBITDA between $510 million and $515 million.

While Q3 cash flow was strong, we are maintaining our operating cash flow guidance range of $430 million to $490 million due to the uncertain geopolitical environment. These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website.

Slide 12 of the presentation provides additional key assumptions that support the midpoints of our 2026 guidance ranges, which we believe remain the appropriate basis for modeling our full year results.

In summary, our third quarter results reflected solid performance across our portfolio, including book-to-bill ratios at or above 1.0x in both segments, record profitability and healthy cash generation.

We remain focused on disciplined execution and delivering on our commitments to drive sustainable, long-term shareholder value. With that, I'll turn the call back over to Carey.

Thank you, Beth. This quarter, we exceeded all of our financial commitments delivering record profitability, excellent cash generation, strong bookings, a record total and funded backlog while expanding our products and other transaction agreement portfolio and strategically repositioning the business towards higher growth, higher margin work.

As we look ahead, our priorities Circle, consistent execution in converting our strong pipeline at recent awards and a profitable growth. While we continue to navigate procurement timing and geopolitical uncertainty, the alignment of our capabilities with our customers' most critical national security and infrastructure needs and demand for our differentiated solutions supports our confidence in Parsons long-term outlook.

We will remain disciplined in deploying capital and focused on delivering for our customers, employees and shareholders. With that, we'll now open the line for questions.

[Operator Instructions] Now first question coming from the line of Sheila Caiano with Jefferies.

Matt, congratulations on your move, and you'll be missed. Maybe to Carey, I guess, how do you think about just the future growth outlook sticking to Federal Solutions. When we look, awards are up almost 50%, book-to-bill is 1.3x. Yet organic growth ex the confidential program is running at low single digits. So I guess what's your line of sight to improvement? You also just mentioned funded backlog is a pretty good statistic. So I guess, how are you thinking about growth as we head into 2027?

Yes. Thanks, Sheila. So I'd say we're very positive on SSS growth. When you look at the book-to-bill, as you pointed out, year-to-date, it's very strong at 1.3x. We've been awarded over 12 different contract actions, greater than $100 million since the start of the year.

The majority of those have been in federal. And in addition to what we talked about as far as the wins, we currently have $850 million awarded to Parsons over a 5-year period that's under protest and another $495 million that's still in the protest period.

So the Federal group definitely has some momentum behind it and funded backlog is significantly up for federal. The goal now is really how quickly we can convert those awards into revenue, and that's where we're laser-focused.

Okay. Maybe a follow-up on that. I guess, as we think about organic growth from the low single digits, should it accelerate next year? And are there 1 or 2 programs that are driving that growth and any of that fall off for FS only?

Yes. So as far as programs that are driving the growth, I would say all the recent new wins, the classified biometrics identity win all the other transaction awards that we've received, which include programs that are basically already full of work like Joint Cyber Hot Kit at $750 million or the Space Command headquarters new award. So those would be some of the key FAA continues to be very strong. We're up 40% year-over-year in FAA, and we see that effort continuing as we go into next year and the air-based Air Defense as well as additional point defense activities remain very strong. We're also doing well on our Defense Threat Reduction Agency Citric contract being the #1 awardee there and Department of Energy Counternuclear systems, bundling and deterrents we're the #1 award there.

So a lot of trajectory in the federal area. As you're aware, we haven't yet provided formal 2027 guidance. As we looked in 2027, we're very confident in the strength of our record backlog. We have $12 billion of awarded contracts to Parsons that we have not yet reflected in bookings and more than $50 billion of our qualified pipeline with over 109 opportunities, greater than the $100 million that are in that pipeline.

But that's we are in a dynamic environment and contract awards are taking longer to convert to revenue. And we do also face some uncertainty related to midterm geopolitical conditions in the Middle East and as I mentioned, the elevated level of protests, which we're waiting to clear. So the good news is, as we get closer to reporting our fourth quarter earnings, we should have better line of sight, particularly on the protest status. We're still confident in Parsons ability to deliver our long-term guidance, which we've indicated is mid-single digit or better and double-digit margins by 2028.

Although we are going to be cautious that some of the macro headwinds that we experienced in 2026 could persist into 2027. So we look forward to providing our full year guidance on our fourth quarter earnings call in February 2027, which is consistent with what we've done in prior years.

Our next question in queue coming from John Golan with Citi.

I wanted to just follow up on this year's guidance. You guys narrowed the range, which completely makes sense. There's still a good amount of range with 1 quarter left in the year, and it could be a complicated quarter with, I guess, news out there of the possibility of a significant escalation in a Iraq, I'm sorry, in Iran after the midterms as well as the midterm themselves, and we'll see how that shapes out. I was just hoping maybe we could dialogue a little bit on low end versus high end and any puts and takes and risk factors to think about for 4Q kind of driving the range?

Yes. Thanks, John. I'll take that one. I'll probably go on the first order. On the cash flow, to your point, we had an exceptional quarter in Q3.

I think we see the opportunity to continue to deliver cash levels at similar levels. However, given the uncertainty, specifically in the Middle East, we've been a bit more conservative on the forecasting there and giving ourselves a little bit more wiggle room at the midpoint.

So I'd say on the cash side, probably some opportunity trending between midpoint and higher end on the cash. Revenue, really strong quarter. Again, kind of derisk Q4. We see a little bit of a decel in Q4 from Q3 but mainly that's the seasonality on programs like and some of the Canada mine jobs and access there.

So if things like protests unwind earlier, we have no revenue in from kind of new, new and the protest on line. So the tailwinds or trending toward the higher end of guide would be on protest and continued performance similar to what we had in Q3 on the revenue side.

On EBITDA, I think you'll see with Q3's performance, it's kind of a flat Q3 to Q4. So obviously, risks and opportunities to EBITDA are always performance related and operational.

So no real risk there in terms of the margins on the executing programs. It would just be maybe higher -- opportunity would be higher volume on products like JCHK and different things and risk would be any unexpected execution issues.

Got it. Very helpful. And in the slides, there was this note about strong contract win rates. Clearly, you guys are producing some wins. We don't have perfect clarity into what the funnel looks like and how much you're out there bidding.

Carey, I think in the last question, you mentioned a very large qualified pipeline. Can you just plug us into the funnel here and how you're kind of thinking through the funnel as we go into 2027?

Yes. So we expect this year, we're going to bid roughly the same amount as we did last year. So on the order of about $19 billion of proposals submitted and again, I'll highlight that our pipeline has been greater than $50 billion for 11 consecutive quarters, so very strong pipeline. 109 opportunities greater than $100 million.

So strong funnel. If you look at the pipeline, it's broken up about $30 billion of that comes from federal with about $23 million from critical infrastructure.

And John, just 2 things I would add the Carey mentioned earlier, the North of $12 billion, that's the highest level that's been since 2024, which is a really good sign.

Obviously, those things are easy to turn into backlog quicker than kind of new, new pursuits. And then on top of that, we have just about $5 billion awaiting notice of award.

Our next question coming from the line of Galtman with TD Securities.

Yes. Congrats, Matt.

Thanks.

Just wanted to follow up on a couple of things. First, on the JV project in Canada that you talked about, what is the remaining kind of charge exposure, if there is any, given the timing of the project? Is it -- just if you could calibrate like how is that considered in the guidance for this year? And is that something that could slip out to next year with the potential charge? I'll follow up.

Yes. Great question, Ganem. As I mentioned on the call, the project is over 75% complete as of today. .

And we expect to be 80% by year-end, 85% by the end of the first quarter. One thing that we did throughout the quarter since June when we had in June and July, the historic rainfall to mitigate the weather risks, we resequenced the work so that we prioritized all the critical activities before the end of this year, and we move work to the right that could be performed during the winter months. We're also working with customer on requested relief for historical weather and other events.

And that's not included in our forecasted final completion date of June 2028. If that schedule were to extend beyond June 2028 or other risks would materialize there could be additional costs or joint venture investment required.

But as you point out, as the project advances and nears completion, we expect the nature and the potential impact of those remaining issues to be less significant than what we experienced historically.

As a reminder, this 50-50 joint venture project, we're the non-managing partner and we have not pursued any similar consortium projects since 2019.

Okay. So there's no assumed charge in the fourth quarter guide. Is that fair?

No.

Okay. I also wanted to just ask at 1 point, we were talking about 3 larger CI projects that you guys were pursuing. I think we talked about it last quarter on the earnings call. Could you give us an update on where those stand?

Yes, on the line that was announced, the concessionaire of the team that was announced as the winner basically bid 5x the concession fee of any of the 3 other bidders. Our concessionaire has protested that award.

Our next question in queue coming from the line of Jonathan Sigman with Stifel.

Best wishes, Matt.

Thanks, John.

I appreciate you guys qualifying product revenue base today. I was just -- can you frame how we should think about the margin difference between products and those services relative to the base federal solutions.

And then you had previously mentioned over 30% growth for Cyber Hunt. Is that specific to that product line or that product broadly? Just trying to gauge how much faster that vertical could grow relative to the base.

Yes. I'll start off on the growth. So as we mentioned and the met will hit the margin, we have $350 million of products and related services in 2026 and we're expecting an increase of between 20% to 30% of our overall products as we go into 2027. That's based on joint cyber Hunt kit, but also other products, including our TRx threat emulation system, our churn position navigation and timing system, our command and control core system, our biometrics and identity management as well as our -- some of our RF capabilities and our tax situational awareness system and some of our space products and our intelligent network products. So quite a robust product portfolio.

Yes. John, relative to margin, I'd say it obviously ranges, I would say, I'll talk generally about products. But I'd say a lot of the product revenue we have today, JCHK specifically was going through LRIP and some of the other programs are still kind of early investment and and growing.

So I would say we expect margins on products in general to be north of 20%. Some of the bigger ones will be right around that plenty, but others are even kind of in the 40% range. So if you think about products as a whole 2x what let's call it kind of high or mid- to high 90s, that Fed should be -- that's probably a good target.

So if we can grow products 20% or 30% again next year at 20-plus percent margin, that would be a good story.

Our next question in queue coming from the line of Gavin Parsons with UBS.

Start to come back on the charge risk contract on CI. I thought last quarter, you said the plan was to be 90% complete by the end of this year. So I just wanted to check if that means you buffered some or accommodated for some additional overrun already in the charge that you previously took?

Yes. What we did, Kevin, is because we had the historic rainfall in June and July, we decided to resequence the work and that it would be better that we could get to an earlier testing and commissioning phase.

So it was intentionally roofing work around to optimize resources. By doing that, that enabled us to reduce our cost and reduce some headcount this year so that we can surge it after the new year.

Okay. And then on the OTAs, clearly, a lot of wins there. I think some of those have been slower to ramp and you had a lot of language this morning around funding decisions and procurement. Any progress on those OTAs transitioning from awarding to funding?

Yes. So we have had progress. Again, I'll point out 2 of them are kind of fully scoped from the beginning, which are 2 of the bigger OTAs. That would be the Joint Cyber Hunt kit where there's a requirement to deliver approximately 74 kits per year for 3 years.

And then the Space Command headquarters, which we fully booked and is fully ramped. So those 2 make up a good portion of what we've already booked. And then we have the OTs that we announced last year, we've already started to receive funding on those. The good news is the scope that we're doing on the majority of the OTAs is focused on the Endo Paycom region, the near Purefit cyber space, missile defense, electronic worker, all areas that are in heavy demand by the department award as well as the intelligence community.

Our next question in queue coming from the line of Andrew Wittmann with Baird.

All right. Matt, we'll miss, George, welcome back. Glad to have you. I guess I'm going to ask 1 of the first questions here on the CI segment. I just -- the organic growth rates here have been kind of low -- the change over the last quarter here is around the Middle East.

Last quarter, the Middle East was pretty good, even though some of the turbulence is already affecting the region this quarter, a little bit of a decel. So I just -- Carey, I was hoping you could maybe address what you saw in the quarter and how that bodes for the future.

Obviously, there's tons of uncertainty here. But I just wanted to kind of think about it like you're thinking about it. And even in North America here, we've been seeing kind of across the board some deceleration in some of the organic growth rates for not just your company but for peers as well.

Just want to make sure we're thinking about what the realistic organic growth rates for that business are. Obviously, you're going to point to the backlog, and that's been pretty consistent here. But just want to try to think about like that, what you're seeing there and think about it like you're thinking about it, please?

Yes, sure. Thanks, Andy. So again, we've had greater than 24 consecutive quarters greater than 10 book-to-bill, which flecks very strongly on the demand for both the Middle East as well as for North America. .

During the quarter, there was some slow in Saudi, which makes up 65% of our Middle East business and that was due to a rephasing of programs by the public investment funds. So you can think about that as timing as well as award timings. So their focus right now is on any program that is based around Riyadh, so that they can get to the Expo and the World Cup events in 2030 and 2034.

So this quarter, while we were at 0.8 book-to-bill for the Middle East, we are -- believe we're going to exceed 1.0 back for Q4 and the reason is that in Q4, we get our annual renewals on our large programs, such as -- just on India, as an example.

In the Middle East, we're very happy. Last week, we had record billable hours, and we've had, as I mentioned on the call, an increase in net headcount every single month throughout 2026. So demand remains strong. I think there are some timing issues that are happening in Saudi Arabia.

On the other side, again, of the conflict, though, we do see opportunities to include areas like rebuild, how do you possibly and actively protect various assets like data centers, utilities and water. So in addition to our kind of our core critical structure business, we see some expansion opportunities into new market areas.

In North America, if you take out lower pass-through, we mentioned that some of our larger design programs had peaked, which includes Hawaii rail and transit, the newer caratrain program and the Georgia State Route 400, those had a lot of pass-through.

So excluding the pass-through, we're actually up 4.5% organic and the good news, excluding the pass-through, that's driving our higher margins that we've been able to realize in critical infrastructure.

Context on that. And I guess, Matt, just for you, just a clarification on the guidance here. You made the point the 3Q revenue EBITDA and cash flow ahead of expectations, but didn't move the full year. Is that -- is there something else that we should understand that it didn't take up the fourth quarter? Is there an offset? Is there -- how -- just wanted to try to understand kind of how you're thinking about that.

Yes. No, there's nothing really there, Andy. Just kind of trying to be thoughtful and look forward to potentially outperforming, but obviously, a lot of volatility given the environment in different places.

So I have high confidence in the midpoint and really just want to get back to that beat mode.

Next question in queue coming from the line of Tobey Sommer with Truist.

I wanted to ask a question, a view on the trend towards OTAs and what you think that, that will mean for the company? How big can that be? And can it be a needle mover in terms of margin? And if so, when?

Yes. Thanks, Toby. So we're excited about other transaction agreements. We have a nontraditional company that we've kept in place since we bought Polar South ebec in May of 2019. We've been awarded 26 OTAs, I mentioned, for $1.6 billion in value.

We have a pipeline of over $2 billion in OTAs. They offer a lot of advantages over traditional federal contracts in terms of the flexibility you can tailor the terms to the project.

It provides access to innovation. You could do a lot faster prototyping. It's quicker from bid to award timing. You negotiate intellectual property terms. You can do more collaboration with consortium public-private partnerships, flexible payment, lower administrative burden and you can also have a production transition is what we've illustrated with the Joint Cyber high kid.

We do like OTAs, they have a defined scope and stated technical objective and are tied to customer mission requirements, which all of our OTA awards have been. The other advantage to your point on margin is most of these are at fixed price. So we do believe that we'll -- these will be margin accretive to our business.

Yes, mainly driven, Toby, by obviously the cost type work, you see some pressure on the margin for ODCs and materials where on the OTAs, you can get the profit across the entire program.

Our next question in queue coming from Matt Akers with BNP Paribas.

Yes, thanks for the question, and Matt, best of luck, been nice working with you.

Thank you, Matt.

I wanted to follow up on just the critical infrastructure margins, really strong in the quarter. Anything sort of unusual that drove that and just your level of confidence to be able to continue to expand margins with that segment?

Yes, Greg, I think to your point, 11-plus percent margin. The only thing I would tell you is pass-through. So you'll recall from the last quarter, we lowered revenue guide for the year by about $50 million through the first half with specific to pass-throughs. .

So through the first half of the year, we had been down about $25 million.

So we assumed a similar trend in the second half. What we saw in Q3 was about $19 million lower pass-through year-over-year. So we do see -- we do get the benefit on the pure margin rate. I was excited to see that EBITDA dollars were up 9% year-over-year.

So business continues to deliver and deliver on the earnings. And so the past 2 where it looks a little bit worse on the revenue side, it does benefit the EBITDA dollars and margin rate.

So nothing particular. It's just the underlying execution of the business and then the mix.

Yes. And then you guys talked a little bit about sort of the funded portion of your backlog. It's been growing faster than total backlog. Could you talk a little bit about -- what's driving that? And maybe should we be more focused on kind of the funded portion of the backlog as opposed to just the total backlog or kind of how to think about that?

Yes, I'll start, Matt will jump in. Yes, we're very happy with 73% funded backlog. I think it's 2 to 3x most of our peers.

So I view that as a good sign again as you start to think about how quickly you can convert awards into revenue.

Yes. The only thing I'd say, Matt, is typically we watch funded because it's more likely to convert to revenue quicker than just total backlog and so funded is obviously evidence of the next 12 to 18 months.

And so positive trends in funding should support the growth outlook.

[Operator Instructions] Our next question coming from the line of Brian Sandberg with William Blair.

Gary, Matt, George and Dave, and Matt, best of luck in your next role.

Thank you.

Thanks, Chris.

Last quarter, you talked about a second half margin of 9.4% in federal. It came in at 9.2% this quarter. Can you just talk about the puts and takes there? And what's assumed in the guide for the fourth quarter?

Yes. So numbers are still the same. 9.4% second half. We are expecting a little bit of a ramp-up in Q4 to about 9.7% for federal. So overall, total year normalized for the adjustment is just north of $9 or 6.7%, including the adjustments from Q2. So it's really just timing on the products ramp up on JCHK, ABAD and a couple of other things.

And also, I'd say just a little less seasonal because FAA, which cost reimbursable tends to be seasonal and is as high in the fourth quarter. And that's cost for us.

Okay. Helpful. And then just can you just maybe talk generally about the impact of the continuing resolution on backlog conversion in federal?

Yes. So first, I'd say we're very fortunate that we have the 73% funded backlog record of $9.4 billion and $12 billion that's been awarded to Parsons, but not yet booked because we can run for a long time under a CR.

Unfortunately, we've become very used to dealing with C. There's definitely still some uncertainty around the FY '27 appropriation to process the NDAA potential supplemental legislations and the next steps that will follow the current continuing resolution.

The current CR funds government through December 11. And if there's not -- if that's not passed, new CR, you could potentially have a shutdown, which we don't think either party is really going to want to have.

But I think the key for us is we're not highly dependent on new budget because of the wins that we've had, 12 contract actions greater than $100 million since the first of the year.

Our federal business is anchored by very large multiyear contracts and single award IDIQ and OTA vehicles, such as missile defense agency, the FAA and a lot of work we do with the GSA FEDSIM, and once again, substantial backlog awarded not booked in a large qualified pipeline.

Our next question coming from the line of Gan Kano with Securities.

I was just wondering, as we look to 2027, knowing you have not given guidance, can you give us a sense for just generically, what do you think the relative growth between the 2 segments might be, which grows faster? And if there's any first half, second half dynamic to be mindful of?

So I would based on the awards that we've had. We anticipate that federal would grow faster than critical infrastructure in 2027. First half, second half, I don't -- can't think of any dynamic.

The only thing I would point to Gautam is depending on the protest, if they extend out longer, I think that could delay kind of the ramp on some of the Fed programs. But generally speaking, it should be flat throughout the year, maybe a little bit of a ramp in Q2.

Our next question coming from the line of Noah Poponak with Goldman Sachs.

Matt, I'll add my thanks for all the time you spent with us over the years. Always super helpful and appreciate it.

Appreciate it.

Can you guys talk a little bit about capital deployment. You've been buying -- you've bought back some stock in the last few quarters, paid down some debt. I know you're always looking at acquisitions and net debt to EBITDA isn't super high, but it's higher than your historical average.

So should I read all of that as the M&A pipeline is a little slower? Or is that not the case? What are you seeing on that front?

M&A pipeline is still strong. We're looking at various opportunities and credit infrastructure as well as Federal Solutions. And I think you can kind of expect us to stay on our trajectory of about 2 to 4 acquisitions per year. We're going to remain highly selective, making sure that we're buying capabilities, not for scale and acquisitions that fill current gaps that we have.

Okay. And Carey, just to the questions you've had on top line growth moving forward? I guess if Federal Solutions is faster next year, I guess I was wondering what the first quarter is that, that moves to positive year-over-year growth.

Just when you're fully clear of all the moving pieces you've had in the baseline compare in that segment? And then on CI, I mean, is there a way to frame how you see the next 3 to 5 years compared to the 3- to 5-year run you had post pandemic?

Yes, let me start and let Mike jump in. For CI for the next 3 to 5 years, we still view a favorable environment.

The Middle East, we've got growth prospects, not just in our credit arrestor business, urban development and transportation, but we've moved into tourism and hospitality, and defense and security, which obviously have become increasingly important. And then we see opportunities as far as rebuild.

In North America, with the Build America 250 at that basically set the floor at $580 billion. Importantly, within that next 5-year surface transportation billers historic investment in bridges. Parsons has done over 4,500 bridge projects. So once again, very well aligned to our capabilities and roads and highways are also focused. We've designed and built over 10,000 miles roads and highways on 6 continents, another very strong core competency for the company and there's a push towards digital transformation, where we're uniquely positioned with our portfolio because we can bring capabilities like artificial intelligence, cybersecurity protection, digital twins because we have all those technologies across our business, particularly driven from the federal side.

As far as federal and the confidential program pretty much the lapping will end at the end of this year. We only have about $15 million that would go into next year that would be overlap.

Yes. No, specifically in Q3, we had just under a $50 million headwind from the confidential contract in Q4, it's 23, and then Q1 will be 15.

So Q4 will likely be closer to flattish, organic. We have a little bit of seasonality with FAA and different things in Fed. So it's somewhere around there. And then Q1 with the lower comp should be -- it should be a positive growth.

And that's all the time we have for our Q&A session for today. I will now turn the call back over to Dave Spille for any closing comments.

Thank you for joining us this morning. If you have any additional questions, please feel free to contact me directly. We look forward to connecting with many of you in the coming weeks. With that, we'll end today's call. Have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.

My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense and Airlines Equity Research team in case you're on the webcast and don't recognize me. We have 31 minutes left in our buyer side chat due to the elevators, but great news. We have the Parsons management team here. And if you haven't heard Carey speak yet, she's the Chairman, President and CEO of Parsons, and she's extra speedy. So we won't have a problem within these 31 minutes; and Matt Ofilos, who's the CFO.

So with that, Carey, Matt, maybe you could just -- for folks who aren't familiar with the story, Parsons has gone through a lot, has had some great wins. How do we think about Parsons going forward from here?

Yes. So first, thanks for having us here today. I'll start off with a very brief overview of Parsons. We are organized for about 50% Federal Solutions, 50% within Critical Infrastructure. We have 21,000 people that work in 25 countries around the world, all 50 states. I'd like to talk about the company in terms of 6 end markets, all of which are growing between 4% to 11% compound annual growth rate.

Starting off with transportation. Transportation represents about 29% of the company's revenue. And there, we're involved in roads and highways, bridges, both those areas are very important as you look at the next 5-year surface transportation bill because they are the 2 areas that are mostly going to get emphasized. We also do an advanced traffic management system, we're the most globally deployed in the world. And we just had an exciting first deployment within the Middle East and the city freon.

And then we're involved in areas like ports and airports. We've done over 450 airport projects, including the new King Salmon in National Airport and 450 rail and transit projects. Second area is cybersecurity, also an area that's very exciting, an area that should be the fast-growing end market at a rate between 9% to 11%. That represents about 20% of Parsons' revenue. There, we do about 60% offensive cyber, about 40% defense of cyber. When the recent wind Sheila that we just had in the defensive cyber area would be the Joint Cyber Hunt hit. That's a $750 million program over 5 years, it's product based, so it's margin accretive, and we're excited about that.

The other area within cyber that's getting increasing attention as critical infrastructure protection. So whether you look at what's happened recently in the U.S. where there's been a tax on the water supply within 12 states. And we recently participated as a founding member of the Project Watershed kickoff within the state of Texas, where we're going to try and help the water companies be able to basically harden our infrastructure through cybersecurity capabilities. That's going to be important.

Whether you look at what's going on in the conflict today in the Middle East, where a lot of the shots are being taken at water companies, utility companies and data centers, that's another area that we can help support. So that's kind of the cyber market. Third market area is space. It's about 15% of the company's revenue. Within space and missile defense, we're the #1 contractor for the Missile Defense HC for system engineering and integration. That's important as we look at the Golden Dome for America program because the missile defense and designated as the lead for the system engineering.

Also in space, we've done over 170 space ground systems. We're involved in space situational awareness, both for Department award, the intelligence community as well as the Department of Commerce, which supports civilian and international missions. And we have an assured position, navigation and timing solution exclusive partnership with Globalstar, now at Amazon, which allows you to get location information in case your GPS is jam because we're using a different frequency constellation.

The next area would be 14% of the company's revenue would be water and environment. We do a lot in area of water, so we're involved in water, wastewater treatment plants. We're involved in desalination. We're involved in water conveyance. We also do mine reclamation projects, 2 of the largest abandon mines up in Canada, Faro and Giant mine, all fall within that.

Next are would be [indiscernible]Ariba development, 14% of the company's revenue. That's what we do in the Middle East. We've been in the Middle East for 7 decades. We are the #1 program manager within Saudi Arabia within Qatar and within the UAE. We're on every single Saudia project. So we're the program manager that is doing the new King Salmon International Airport, we're the program manager for King Salman and Park, 5x size Central Park. Program Manager for Cadia, the world's largest entertainment city. We're also redesigning the roads and highways around Riyadh, going to be critically important to get that right for the upcoming Expo and World Cup, and we deployed our advanced traffic management system.

Then the final area about 7% of the company's revenue is critical infrastructure protection. When the recent wins we had in that area was $392 million classified win that we announced in the fourth quarter, that leveraged our biometric solutions capability. We do biometrics for over 50 different customers, state local Department of War and intelligence community. There, we also, within critical infrastructure protection port 285 embassies and consulates throughout the world, providing counter unmanned air systems in addition to biometrics capability. So a quick snapshot and 1 additional comment I would make on recent awards. This year, in the first half, we have been awarded 9 contracts greater than $100 million. That compares with 7 a year ago. and 5 years before that.

So we're on a trajectory where we've won quite a bit of big awards. And within the 9%, 5% new new business, 3 are follow-ons and 1 was [indiscernible].

Great. Lots to digest there. Can we talk about the Federal Solutions business. Bookings were stellar in the quarter, and they accelerated significantly at 45% in the first half, I'm sorry, for a book-to-bill 1 million -- what are some of the demand signals you're seeing? What's benefiting from the defense budget versus what you're seeing from recompetes and new business opportunities?

Yes. So to your point, Sheila, we had a 1.4 book-to-bill for federal in the first quarter, 1.3% in the second quarter. So federal bookings have been very strong. And then after the quarter ended, it was also announced on the federal procurement data system that we were awarded a $665 million counter UAS job with the army that's going to be over a 7-year period of performance. So I would say where we're seeing acceleration is in a lot of our classified programs such as the Navy's Intelligence carry-on program, that was a new start, $184 million over 5 years.

We also won some other transaction agreements. Two of those were worth $400 million. Those are over 3 years. And OTAs, I'd say, is an area that we're really excited about because we currently have about 94 OTAs between what's in our pipeline and what's been awarded. 37 of the OTAs have been awarded. So we're seeing this now be kind of billions of dollars type of representative for our market.

And then the Joint Cyber Hunt Kit, I'll hit on, again, that's a great example of where we applied artificial intelligence. So we had the first deployed Agentic AI use for a cyber threat hunt kit. And I think it was a key enabler to us winning. The neat thing about that contract being another transaction agreement, originally 101 company submitted white papers. It was down selected to 3 companies for a prototype and then we were ultimately selected as the winner for that contract. That was done in a period of like 9 to 12 months, so something that traditionally would have taken a long time, and that's the benefit of what's happening in acquisition reform.

So now we're going to be delivering 74 kits each year for the first 3 years. And then the last 2 years, that contract is going to be opened up for international customers and other military services.

Lots to digest. How do we think about that $11 billion pipeline as well? You've mentioned it. It's been pretty constant actually over the last 3 years. How do we think about it expanding things moving into backlog and into revenues?

Yes. So our backlog is about $9.3 billion, 71% of which is funded, which is very strong compared to any of our peers. We also have an $11 million awarded not booked. So you can think of that that is work that has come to persons as a single prime contractor. Half of the $11 billion represents option years on follow-on contracts and the other half of the $11 billion represents potential ceiling value. So that would be like an OTA where we have to drive work to that.

That number will tend to fluctuate based on when we do bookings. So a good example -- last quarter, we booked $593 million for our FAA contracts. So that was for the 3-year option year. So that comes out of the $11 billion and gets reflected into bookings. And then we also booked $514 million for our missile defense agency contract last quarter over 2 years. That was the follow-on option year for that. And we'll be replenishing it with some of the new awards that I mentioned like the $665 million counter UAS award.

Can we talk about Federal Solutions as well, just the organic growth ex the confidential program, which has been a lot in the news. You've had growth organic growth, low to mid-single digits outside of that. Can you maybe help us understand what drives FS growth from here going forward? I know Joint Cyber Hunt is one of the maybe 1 point of growth, but you have lots of strong growth drivers from here.

Yes, I'd say just -- I know Carey hit on this, but 1.4 book-to-bill in Q1, 1.3 in Q2 within federal. We're seeing favorable trends in Q3 as well. So everybody remember last year was pretty weak on the book-to-bills across the entire entire group. So it's nice to see federal recovering on that side. And so to your point, low to single-digit growth this year on an organic basis, but we see favorable trends going into next year. We've said mid-single digit or better at the corporate level, and we think that will be split between the 2 segments. So really strong kickoff for the Federal group on the back of JCHK, A lot of the new awards that Carey mentioned in the first half of this year that are truly no new work to us. So those should be ramping in the second half of this year and into next.

And then I would also add, we're seeing on contract growth in areas like our muscle defense same-state contract, which will ramp up as part of Golden Dome, our FAA work, which we expect to be about a 40% year-over-year increase. And then our contract that protects U.S. air forces in Europe, which is airbase AirDefense.

Got it. within your space and national security portfolio, Carey, do you mind reminding me how much -- how big of the portfolio it is. And you recently won a $245 million Naval Research Laboratory, IDIQ. How do you think about that when strengthening your position there?

Yes. So again, federal represents about half of Parsons' revenue. And then our defense and intel business is about 70% of federal. So that's how large our national security portfolio would be. Within the space area, we were re-awarded the National Research Lab. It's a contract that supports space ground systems. Some of the work we're doing is going to help get disaggregated space architecture.

So if you think about we're going to transition from a lot of large satellite vehicles, small satellite vehicles, Parsons is developing a software suite that's called the Neptune Software suite that basically is the ground system portion of that. So national security, whether it's cyber, space, missile defense, signals intelligence represents a significant part of our portfolio and one, by the way, that was purpose-built to outpace near-peer threats. We put this together intentionally through M&A. We've done 17 acquisitions since 2017, 12 of them have been the federal business, 10 of those have been within the national security space.

Can you talk about just maybe on the Chesapeake transaction, how that helped you win the Joint Cyber Hunt kit? And maybe products, we talked about products in June, how big of the portfolio represents and how you think about that part of the portfolio growing?

Yes. So I'll hit the first part, and I'll have out here upon the products. So from an M&A perspective, I want to highlight several of our acquisitions because I think that's been critical to our success story. If you look at Exator when we bought Exator, that ended up landing an over $2 billion confidential contract for us. And then recently, our $392 million win that leveraged our biometrics capability in the fourth quarter that was a takeaway from a Tier 1 prime.

If you look at Chesapeake Technology International, the one that you just asked about, Sheila, I would say that we've won both of the other transaction agreements worth $400 million, and we just acquired Chesapeake technology a year ago. If you look at our ceiling tech acquisition, that was what landed the $750 million joint cyber hunt kit contract. If you look at Black Horse a couple of years ago, that landed a $1.2 billion GSA Fed SIM contract. Black signal got us into the special access program.

So we're doing a lot more classified space and cyber work than previously. And then if I turn to a couple of the ones that are on the critical structure side of the house, I would say IP Keys as an enabler. IPS has a tool set that's called Cyberscape that's in use with over 400 electric and utility companies. And when you now look at the need to protect those companies against cyber vulnerabilities and make sure that you have them defended. This is an AI ML-enabled tool set, again, that's rapidly deployed throughout the industry.

And then TRS group, I'd hit on TRS Group provides thermal remediation. So if you're looking at PFS PFAS emerging contaminants, that's a market that represents $40 billion addressable for Parsons, TRS group has really helped us increase our sales in the PFOS/PFAS area. You want to hit on the product, Matt?

Yes. So in 2026, products will represent about $350 million at the corporate level. About $300 million of that is on the federal side. So think about 10% of the federal business being products-oriented. And so a lot of these products were kind of making the transition to full production. And so with CHK is a critical win for us, we do see north of 20%, probably 20% to 30% worth of growth next year at accretive margins. So really a great part of the story on margin expansion within Federal over the next couple of years.

And just to highlight a couple of more of the product offerings that we have. So I mentioned biometrics earlier. We sell that to over 50 different customers. Our command and control core system, which is currently being used in the ongoing conflict in the Middle East. That has been selected as they are tasking program of record for the forest that's another product that we sell internationally. We have assured position, navigation and timing, which we've successfully demonstrated in the U.K. crane conflict that we believe will also be beneficial to the Indo Paycom region.

And we have a product called the Trex system, which is basically a threat emulator that's also been deployed in conflict. And then we also have an antenna as a ground service solution that we develop the infrastructure for that customers can combine as a service. And then not to leave out critical infrastructure side of the house, our intelligent network program, again, one of the most globally deployed applications for how do you manage traffic both around congestions or traffic accidents. So broad portfolio that we're putting increased emphasis on.

And how do you think about the $350 million growing Joint Cyber Hunt Kit will help? Is that going to grow double digits? How do we think about the growth versus the rest of Parsons?

Yes. Going into next year, we expect 20% to 30% growth within products for 2027. Corporate, we're talking mid-single digit or better revenue. So it's both accretive on the margin side and faster growth.

Just to touch on the FAA business. There's been a lot of contention behind your FAA franchise, but you have 40 years of experience with the agency. How do we think about the FAA build-out from here your large existing contract, which I think represents $250 million of revenue and how you continue -- you expect to continue to build on that?

Yes. So the FAA contract is second largest in our portfolio. We've been doing a great job of increasing the growth on the FAA. We expect about a 40% year-over-year revenue increase on the FAA program. FAA is a critical customer of Parsons. We've supported the over 5 decades. We have been on the technical sport service contract for 24 years. That's a contract that is valued at over $2 billion. And we're involved importantly in all work streams of the FAA. So whether that's doing automation work or surveillance work or communications work or facilities work, we're involved in all aspects of that.

We were recently selected to do some of the radar demobilization work as an example, which is a critical component for the air traffic control modernization. We're involved in the voice communication switch implementation. We're working as subcontractor to Rohde & Schwarz and also starting to support Frequentis on the deployment of those. That was another critical part of their traffic control modernization. So what we're seeing is not just improvement on our current FAA technical sport service contract, but we're also getting new contract work as a result of that funding.

How do we think about AI, it's becoming -- it's a hot topic. It was really for the services group, but it's also morphed into becoming a beneficiary and a tower the Parsons team. How do we think about how you're using AI capabilities within your business and how it's benefiting Parsons?

Yes. We've been involved in artificial intelligence for over 2 decades of this company. We started off we developed an early version of what I call a chatGPT like solution, which would basically sort through up open source...

Would you answer all of them, by the way, Carey at the same time?

Which would basically sort through open source intelligence information for the intelligence community. And then if you fast forward today, because we're a mission solutions company, we are using AI as an enabler to help us win more business and also expand margins. Because if we can come up with a better solution, leveraging AI, that's good for our business. several examples, I talked about Joint Cyber Hunt kit and the deployment of the first Agentic AI for that application. We're using artificial intelligence for object detection and our counter unmanned air system suite.

On the critical infrastructure side of the house, we use it for our intelligent network work. We also use it in the energy area for areas like distributed energy resource management. So if you're adding renewable energy loads, can determine what that does to your loading but also to the bills that you're paying for your customer.

And then internally, we use it, Matt, is it for cash forecasting. We use it to see if we're going to win or lose a program. It's got great accuracy. I think that's been key to helping us sustain over 60% competitive win rates as we go forward. So it really allows you to increase your knowledge at speed if you're applying that as a critical enabler. We're a partner with all the frontier model companies. We use different models on different use cases, but the key for customers is how you apply AI to get to the best use case.

In the case of our federal business, get solutions out there operationally relevant to the warfighter faster. In the case of our critical infrastructure business, it's how do I better design and predict infrastructure. So we're designing now for a 100-year life cycle and to a 30-year life cycle, and we can use it to predict things like bridge failures, for example.

That's really neat. Maybe one more on Federal Solutions. Can you remind everyone what happened with the $80 million of charges in the quarter. It drove the share price down. And actually, when you walk through the items, it makes a ton of sense. How do you think about the normalized profitability profile with an FS?

Yes. So to your point, Sheila, we took a $77 million charge within the quarter within our Federal segment. Traditionally, Federal has not I'll call it, performance-related issues. It's been kind of mix related on the margin side. On a normalized basis, at the end of the year, Federal will be low 9%, so call it, 9.1% margin. We expect Fed margins to trend favorably over the next couple of years on the back of products plus additional -- some of this new work that's accretive margin as well. But to your question on what happened within the quarter, we had a program in a remote location.

We've kind of challenge in the past on this. We made the decision that it was in the best interest of Parsons to just exit this program. So we started negotiations with one of our subcontractors and the customer to just exit this business. So to your point, this is a onetime event. It's unfortunate that it happened within the quarter, but it's behind -- it will be behind us as soon as we sign a purchase agreement and get innovation. But this is definitely a onetime event the Fed margins have some runway ahead of us as we get toward mid-9s over the next couple of years.

So it's moved over to a sub supplier and that contract is now off your books?

Today, it is in held for sale. We're -- it's continuing negotiations, getting through a purchase agreement, innovation with the customers. So after -- at that point, it will be no longer be on the books.

And just going forward, the mid-9% going or how do you think about other potential programs with risk? And I think Carey mentioned on our call back, this was one that you had on your watch list for a long time. Are there any other remote contracts or contracts that you see having feasibility issues?

Yes. Within the federal segment, there are no others. We have other programs -- 3,000 programs across the portfolio. So we've always got a few that we're watching. But this one was obviously an outsized charge and risk structure that we would not bid going forward. This is very few folks that we had on -- in region and different things that we've -- partners and things like that. Logistics became with the Strait of straight Hormuz and conflict in the Middle East. So there's a whole lot of items that added up to a very difficult program. And so the rest of the portfolio is much cleaner on the federal side without a doubt.

Now on the critical infrastructure side, we have 3 kind of, I'm going to say, legacy construction JV contracts that we're wrapping up. So the one is the one that we had historic rainfall on that we experienced during the second quarter. We're expecting 90% complete on that project by the end of this year, then transition over into a support service role. And then the other 2 JVs have been running very well.

Can we talk about the critical infrastructure business? I think you had onetime items in there as well in the quarter. What were those? And how do we think about them going forward?

Yes, that was the construction joint venture that I just mentioned. That was basically the once in 100 years.

I was preparing for the next question, I think distracted. And in the Middle East, I think it's within your critical infrastructure portfolio, I think Middle East represents 20% of sales and 80% of that is 3 contracts that you have. So how do you think about just your Middle East growth rate going forward? And 3 contracts that you've performed for 5 decades, I believe, just being kind of relatively flat and other growth drivers driving the business.

Yes. So I would say Middle East has been an exciting area for us, one that we've had double-digit growth over the last few years and also in Q2. And the group has done a terrific job during the conflict [Audio Gap]

defense security, technology and infrastructure come to play. And they've realized that they have to do things internally and not be dependent on external factors like the Strait of Hormuz. So there's an estimated $2.1 trillion that will be spent by the GCC countries between now and 2030. And a lot of that effort is going to go on this domestic resilience.

So we're very well positioned there, having been in the region for 7 decades with a 5-decade partnership with our JV partner in Saudi Arabia to be able to capture some of that. We have projects in the defense world already today in the security world as far as designing border wall type of work. We do work in our traditional markets of urban development, transportation. And we've also moved into hospitality and tourism and that's going to be an important growth driver. So excited about the Middle East business.

And Sheila, just for clarity, within the 80%, there's the 3 largest programs we have in the Middle East are there, but there's hundreds of programs that add up to the 80% the single largest program for the company in the Middle East is 1.4% of revenue. So...

And you mentioned Middle East protection, but you also mentioned in Texas, you're working 14 sites in the U.S. have been attacked and you're working with water agencies. How do you think about like the infrastructure protection business today where it stands, what it includes and how that business could grow?

Yes, this is where we think -- I'm going to say we have a very unique portfolio because you have to be a company that operationally understands how these critical infrastructure sectors work. but then be a company that can deploy cyber and physical security capabilities to be able to protect those. So if you look today, a lot of our critical infrastructure work is supporting water and utility companies, again, 400 of those to date. We are involved in Project Watershed, an important initiative between the state of Texas and the White House National Cybersecurity Director on how to use Texas as a pilot project for the rest of the United States to be able to protect the water supply.

For Parsons, we look at the 16 critical infrastructure sectors and we focus on the ones where we have installed base, the ones our highest threat driven and the ones that are highest regulatory driven because that's the hardest barrier to entry and the most complex problem. So we're focused on transportation sector, the water sector the utility sector, health care and facilities, 5 of those 16 sectors. So we do see that being increasingly important, not just in the United States, but also what's going on in the Middle East with being able to help them protect their data centers help our military, protect the military facilities and the water and utilities in the Middle East as well.

That's great. And I guess, on the environmental remediation, you mentioned PFAS briefly. How do you think about that business somewhat adjacent. You also mentioned TRS acquisition helping that long-term view. How do you think about the PFAS remediation business growing?

Yes. So PFAS represents a 220 total addressable market. And for us, we believe our addressable market out of that is about $40 billion. Within PFS/PFAS, we have 7 patents. We have 5 that are approved, 2 that are pending, including 1 patent that's called the Hot ESCO, which has been approved, and it basically has the ability to eliminate the PFAS molecule on site. Usually, you will take a PFAS molecule and you have to take it to an incinerator.

Our technology does not require incineration. And then we have another exciting patent that is pending on catalyst and that also, we believe, is going to transform the market and how you eliminate PFS, PFAS from water, wastewater and soil. So we think we're uniquely positioned here. We've had a research laboratory up in Syracuse, New York that's been in place for 3 decades. That's where we do most of our patent work. We're also able to cover the total PFS/PFAS life cycle. So whether it's investigations, we've done over 2,000 point-of-use investigations over 7,000 total investigations.

Then you get into the remediation and treatment, and then you have follow-on life cycle and support. Parsons can cover that whole life cycle for the PFAS.

Maybe just to sum it all up, how do we think about your revenue growth profile from here and margins going forward?

Yes. High level, I would say, at the company level, we've said mid-single digit or better revenue growth going into next year, margin expansion of another 10 to 20 basis points off of the original guide for this year. So I think of high 9s, low tens as we go into next year, I think the federal business has the best opportunity for margin expansion. Our critical infrastructure business has been performing quite well this year, normalized for the charge of course, but that's north of double digits for the past 6 quarters now. And so the business is performing really well.

We do expect some large design jobs that we'll award toward the latter half of this year and early next year. So with that comes a little bit more pass-through. So you might see a little bit of downward pressure on infrastructure margins, but purely mix related. Fed has the opportunity on both products and then just the new business that's been awarded. So again, opportunities for margin expansion across the portfolio and strong growth at the mid-single digit or better.

And then maybe last one, just to wrap it up. You guys have had consistent solid free cash flow conversion of over 100%. How do you think about -- Carey, I'll get both of you involved in this one, if that's okay. How do you think about the portfolio going forward? You've had great bolt-ons in addition to that? Is that how we think about capital allocation priorities from here?

Yes, I'll hit free cash real quick. We have really strong free cash flow conversion. Again, this year on adjusted net income, we're going to be about 115%, so strong again this year, some opportunities for working capital improvements over the next 12 months as well. So we see cash continuing to improve as we get into next year. To your point, acquisitions have been a big part of our capital deployment. We are -- the Board did authorize an uptick in our share buyback.

Obviously, the dislocation in the stock is an attractive place for us to put our capital point. So you can think of an elevated repurchase in the second half. And then we'll get back into M&A as we get into next year, and Carey, you can probably talk to that.

Yes, I would just add to that, I would say M&A is going to be critically important. That's really what's enabled us to move up the value chain to bid and win larger programs. And I say several examples earlier of how quickly we can turn that M&A into contract wins and into revenue drivers. So that will continue to be our priority for the future. We typically do about 2 to 3 acquisitions per year. We've done 1 this year with the Altamira acquisition.

Great. Well, thank you.

Thank you so much for being here.

Thank you for having us, Sheila.

Thanks, Carey. Thanks, Matt. Thank you.

Good day, and thank you for standing by. Welcome to the Parsons Corporation Second Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Dave Silly, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our second quarter 2026 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our second quarter financial results as well as a review of our 2026 guidance. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors described in our Form 10-K for fiscal year ended December 31, 2025, and other SEC filings. Please also refer to our earnings press release and presentation slides for additional forward-looking statement disclosures. 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 their comparable GAAP measures.

Please refer to the earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. In addition, for the second quarter of 2026, management has presented certain financial measures on a normalized basis to exclude the effect of certain portfolio-shaping actions in a joint venture charge. Normalized financial measures are also not non-GAAP financial measures in the earnings press release and presentation slides include reconciliations to the customary GAAP or non-GAAP presentation as applicable. And now I will turn the call over to Carey.

Thank you, Dave. Good morning. Welcome to Parsons Second Quarter 2016 Earnings Call. During the second quarter, persons demonstrated the robust demand for our integrated solutions discipline of our strategy and the profitability and resilience in our core business and will remain to a dynamic macro environment for both the U.S. federal government and the Middle East region. Both segments continue to post strong book-to-bill ratios and win strategic awards with Federal Solutions bookings up 51% year-over-year.

On a normalized basis, our core business delivered profitable organic growth in line with our expectations. And strong adjusted EBITDA, particularly in critical infrastructure. The Middle East business maintained excellent performance with book-to-bill exceeding 1.0x and 10% organic revenue growth. illustrating our strong alignment to regional spending priorities throughout the ongoing conflict. While we experienced strong demand for our high-value offerings, we also took decisive actions related to projects that do not align with our strict profitability and risk criteria.

Since our 2019 IPO, we've been focused on acquiring businesses that expand our capabilities and customer base while exiting those that do not support growth. The disciplined decision strengthen our company for the long term. This quarter, adjusted EBITDA was impacted by $118 million of nonrecurring events, including a $77 million charge on a remote contract and $41 million related to an extraordinary weather event and schedule delays.

In our Federal Solutions segment, we took portfolio shaping actions to focus on profitable, sustainable growth. This resulted in a $19 million gain from selling two advisory contracts and $77 million loss on two nonstrategic remote contracts that are held for sale.

The advisory contracts in our Federal Solutions segment, known as SETA, systems engineering and technical assistance contracts provide independent advice to the government. This work created a potential organizational conflict of interest with our growing development work for an intelligence community customer. By divesting these contracts, we've enhanced our ability to focus on delivering critical national security space ground solutions at substantially higher margins. This is a clear case of exiting good work to win better work and our continued high-value solutions evolution.

We made the deliberate decision to exit two Federal Solutions programs in a remote location that no longer fit our risk profile. These programs face staffing and supply chain challenges at increased costs and continuing to perform them would have required extensive subcontracting and disproportion of management attention. With a signed letter of intent in place and the customer indicating a willingness to support innovation, subject to the customary approval process, we believe this action meaningfully reduces our exposure with the financial impact appropriately reflected in our current results.

We expect to close in Q3 2026. This lets us focus our resources on higher growth, more profitable areas of the business. We continually review the performance of all our programs with a focus on execution, opportunities, risks and financial results. These two contracts are not indicative of our consistently strong operational performance and high-value solutions portfolio and federal solutions.

In addition to these portfolio actions, we recorded a $41 million charge in critical infrastructure on a joint venture project following an extraordinary weather event that disruptive productivity and schedule performance.

In June, the region experienced historic rainfall at the highest level in over a century. These very unusual conditions and program delays reduced productivity and increase the cost to complete the project. Our team exits swiftly and responsibly by adding labor, equipment and subcontractor resources to keep the program on schedule and meet our customer commitments. We've updated our estimates to complete and that revised view is reflected in this quarter's results and the program is expected to be 90% complete at year-end. Importantly, persons as a non-managing partner in this joint venture.

And since 2019, we have not pursued similar consortium projects. Matt and I will present today's financial results on a normalized basis without the portfolio actions in charge to provide a clear view of our core business performance. The reconcile of financials are included in the PowerPoint presentation.

In the second quarter, in line with expectations, total revenue rose 8% and organic revenue increased 3%, excluding the confidential contract. Federal Solutions grew by 11% and critical infrastructure by 5%. We delivered an adjusted EBITDA margin of 10.1%, powered by an 11.9% margin in critical infrastructure. This continued improvement in critical infrastructure margins underscores the strength of the backlog and new business as we deliver growth with favorable business mix.

The 70 basis point margin increase builds on last year's 40 basis points. Bookings were outstanding across both segments this quarter with contract awards up 24% year-over-year, resulting in an overall book-to-bill ratio of 1.2x. Federal Solutions' bookings increased by a robust 51% year-over-year, delivering a 1.3x book-to-bill ratio. Critical infrastructure achieved 1.1x representing the 23rd consecutive quarter at or above 1.0x, demonstrating sustained demand.

In the Middle East remains strong with a 1.1x book-to-bill. Bookings in the first half of 2026 were very strong, with Federal Solutions up 45% and and book-to-bill ratios of 1.3x for both Parsons and Federal Solutions and 1.2x for critical infrastructure. This provides a solid foundation for accelerating growth in the second half of this year and demonstrates the strength and differentiation of our portfolio. The work we're winning is strategically important in well-funded areas.

This quarter, Parsons won five contracts exceeding $100 million, including two for new work. For the first 6 months of 2026, we've won nine contracts over $100 million compared to seven in the first half of 2025 and five in the first half of 2024. Our technology leadership is a decisive competitive advantage in securing large-scale programs. 4 of our $500 million wins this quarter incorporated artificial intelligence, a key differentiator for Parsons.

In the last three quarters, we secured 13 contracts over $100 million with 10 involving advanced AI -- with over 20 years in operational AI, we apply its areas, including autonomous cyber, counter-unmanned aircraft systems, electronic warfare and smart mobility, supporting revenue growth and margin expansion. Our marquee wins this quarter underscore our strategic positioning and technology leadership. We received a two-year $514 million option under the Missile Defense Agency's technical, engineering advisory and management support systems engineering contract continuing our four-decade partnership with MDA.

The contract covers advanced engineering for the integrated missile defense system, including work on Golden dome, which contributes to additional growth. We booked $195 million during the second quarter. We secured $400 million in contract awards through two other transaction agreements each with a three-year period of performance. These new OTAs reflect demand for our mission-critical defense and intelligence solutions and confidence in our ability to rapidly deliver.

We booked $125 million on these contracts during the quarter. We were awarded a five-year $245 million single award IDIQ contract from the United States Stable Research Laboratory with both recompete and new work. Under this contract, Parsons will enhance mission-critical software and cybersecurity for space and ground systems, and we booked $71 million on this contract during the second quarter. We were awarded a seven-year single award IDIQ contract with a ceiling value of $184 million to support the Department of Navy's Intelligence carry-on program.

This contract represents new work and supports rapid delivery of innovative capabilities to enhance speed and agility for the war fighter. We booked $26 million on this contract during the second quarter. We were awarded $161 million contract to continue serving as the main construction manager for the Canadian Giant mine remediation program.

We booked the full amount of this contract during the second quarter. In the first quarter, we booked $250 million on the Joint Cyber Hint Kit. This quarter, Cyber Command expressed their intent to increase the Joint Cyber Hint Kit, or JCK contract selling to $750 million. This is a testament to our ability to deliver advanced deployable solution at scale. Our effective M&A strategy has enabled us to win larger and more profitable programs across both segments and I'd like to highlight a few recent examples.

JCHK brought together Parsons cyber operations experience with Sealing Tech's advanced edge computing capabilities, including a genic AI. Sealing Tech also played a role in securing the $184 million Navy Intelligence win this quarter. Similarly, the $400 million in OTA wins were led by Chesapeake Technologies.

Lack Signal enhanced Parsons classified capabilities, making us an approved contractor with greater access to highly classified projects and secure networks. The biometrics capabilities for [Maxtor] enables the $392 million classified win we announced in the fourth quarter. We're capitalizing on Altamira synergies in signals intelligence, space and missile defense and foreign military equipment analysis.

Recent critical infrastructure acquisitions strengthened our transportation and water market position and expanded our customer presence. As a preferred acquirer, we continue to buy differentiated companies to produce new integrated solutions for our customers. Alongside securing new strategic contracts, our acquisitions and internal investments have established a robust portfolio of mission-focused products.

Today, products account for 10% of our federal business, and with their rapid growth, they're expected to bolster our bottom-line results. We offer both hardware and software products directly to customers as components with their broader company solutions. Parsons' national security products and solutions provide operational advantage in cyber operations, electronic warfare and tested environments and include the Joint Cyber Hunt kit and [Texpread] emulation tools. We protect critical infrastructure, public venues and transportation using advanced security and identity management.

Drone Armor counters unmanned aircraft systems. [Ares Next] and Javelin deliver biometric identity management and the tactical awareness can improve situational awareness for major recent sporting events. Our Orbit exchange and focast-pased products enable resilient satellite operations. The iNetAdvanced traffic management platform helps global transportation agencies enhance mobility, safety and efficiency. Throughout our product portfolio, we leverage artificial intelligence doomed operations, optimize efficiency and create personalized user experiences for faster and better solutions.

This quarter, we are in top three global rankings from engineering news record for program management, professional services and program construction management for fee, and we won two American console engineering companies, Engineering Excellence Awards. The Canadian Institute of Steel Construction awarded us for infrastructure, and we were named a Vets Index as 5-star employer for our support of veterans. Looking forward, we are very confident in Parson's future with a strong and synergistic position in Federal Solutions and Critical Infrastructure segments.

Within Federal Solutions, we are closely aligned with the administration's priorities and are quick to deliver the speed, agility and advanced solutions the Department of -- for requires. We're encouraged by the ongoing bipartisan momentum to increase U.S. defense spending.

For fiscal year 2027, the administration has proposed a $1.15 trillion base defense budget representing more than 28% increase over 2026. Importantly, the proposed FY '27 budget is closely aligned with Pearson's core strengths in missile defense, cyber, space, counter and aircraft systems, electronic warfare, facilities modernization and joint all-domain command in control.

Our purpose-built portfolio has differentiated capabilities that help seater nation and stay ahead of evolving threats. Strong demand continues in our Critical Infrastructure segment across North America and the Middle East. In North America, our emphasis on hard infrastructure such as roads and highways, bridges, airports, rail and transit in intelligent transportation systems matches bipartisan priorities and aligns with the proposed surface transportation reauthorization bill.

Notably, as of May 2026, only 44% of the infrastructure investment and job sac funds have been spent. The Build America 250 Act proposes $580 billion of stable funding with the largest bridge investment to date. Both bills increased formula funding to 90% and permitting reforms help states advance major infrastructure projects and ensure sustained demand.

Our Middle East business performed well in the second quarter, exceeding expectations despite geopolitical issues and affirming our brand strength and leadership. EMEA saw a 10% organic revenue growth, a 1.1x book-to-bill ratio and strong profitability. Opportunities remain robust due to ongoing investments in transportation, urban development and infrastructure for major events, all areas that align well with our core strengths. We expect increased investments in counter UAS, cyber defense, integrated air and missile defense, desalination and critical infrastructure protection of water, energy, transportation pipeline and data centers. Reconstruction in Syria, [Gus] and Ukraine may offer additional long-term potential. The Middle East continues to be an attractive growth market with strong demand and our promising pipeline.

Entering the second half of the year, we expect growth driven by our backlog of $9.3 billion, of which 71% is funded. Excellent book-to-bill ratios in both segments, strong win rates and $11 billion of contract awards not yet booked. We are adjusting our fiscal year 2016 guidance for the portfolio actions and timing-related items, which Matt will discuss.

This quarter, Parsons secured major contracts and made strategic moves that strengthen our competitiveness and long-term growth and profitability. Our diverse portfolio spans six end markets with growth rates ranging from mid-single digits to greater than 10%. And with strong leadership, accounted a 21,000-person workforce and an innovation-driven approach. We are well positioned for sustainable growth and shareholder value.

With that backdrop, Matt will provide more details on our second quarter financial results. Matt?

Thank you, Carey, and good morning, everyone. The second quarter was highlighted by a strong underlying core business as we continue to focus on derisking and stabilizing the portfolio to drive long-term growth and shareholder value. With book-to-bill ratios of greater than 1x in both segments for the second straight quarter, revenue of $1.6 billion, in line with expectations normalized adjusted EBITDA margin of greater than 10% for the second straight quarter and $9.3 billion of total backlog, we are well positioned to capitalize on favorable market conditions with tailwinds in both segments.

Before turning to our results, I'll provide clarifying details on the items we have excluded from our adjusted core operating performance to ensure full transparency. The portfolio shaping actions Carey described further strengthened our market position by expanding development work with the strategic intelligence community customer. Additionally, we will enhance our margin profile by exiting a business that no longer meets our risk and margin criteria.

Related to portfolio shaping during the quarter, we recorded a $19 million gain from the divestiture of two SETA contracts and a $77 million loss on programs that are currently treated as held for sale as we have a signed letter of intent with the intended buyer. We do not anticipate material residual obligations beyond a customary transition period. Both actions are accretive to our go-forward organic growth and margin profile. Additionally, we recorded a $41 million charge related to a joint venture on a project that was affected by historic rainfalls in Q2. This charge reflects a full reestimate of the cost to complete the project, including the additional labor, equipment and subcontractor resources we deployed to keep the program on schedule. We believe this charge appropriately captures the impact and the program is expected to be 90% complete by the end of 2026.

As a reminder, we have not pursued this type of consortium business since 2019. My discussion today will highlight our results on a normalized basis since we believe this approach offers a clear picture of how our businesses perform. You can find a complete reconciliation for both revenue and profitability and our PowerPoint presentation, which is available on our Investor Relations website.

Turning to the details of our second quarter results. Consistent with our expectations, total revenue grew 8% and 3% on an organic basis, excluding our confidential contract. These increases were driven by growth in our transportation and urban development markets.

Highlights included strong growth on key contracts, including FAA, Airbase Air Defense, King Salman International Airport and Cadia. Total revenue, including the confidential contract grew 1% from the prior year period and was down 4% on an organic basis. SG&A expenses for the second quarter increased 3% from the prior year period, primarily driven by acquisitions. Strategic investments in both SG&A and CapEx remain focused on long-term growth and sustainable competitive differentiation. Normalized second quarter adjusted EBITDA of $161 million increased 8% from the prior year period, and adjusted EBITDA margin expanded 70 basis points to 10.1%. These increases were driven by improved infrastructure margins and contributions from accretive acquisitions, building on the 40 basis points of expansion we delivered in the second quarter of 2025.

I'll turn now to our operating segments, starting with critical infrastructure, where second quarter revenue grew by 5% year-over-year, led by organic growth of 4% and inorganic revenue contributions from our Applied Sciences acquisition. Organic growth was primarily driven by strong performance in the Middle East, where revenue grew 10% on an organic basis. Critical Infrastructure adjusted EBITDA of $97 million increased 18% from the second quarter of 2025 and adjusted EBITDA margin expanded 140 basis points to 11.9%. These increases were driven by accretive growth in the Middle East as well as improved mix in North America on higher Parsons labor contributions.

Moving to our Federal segment, where second quarter revenue increased 11% and 2% on an organic basis, excluding the confidential contract. These increases were driven by growth in our space and missile defense market and transportation markets and contributions from our acquisitions of Altamira and CTI. Total Federal Solutions revenue, including the confidential contract, decreased 3% from the prior year period and 12% on an organic basis.

Federal Solutions adjusted EBITDA of $64 million on a normalized basis declined 5% compared to the second quarter of 2025 with an adjusted EBITDA margin of 8.2%. The decrease was primarily driven by lower volume on the confidential contract and unfavorable mix as a result of higher materials and subcontractor efforts diluting margins. Looking ahead to the second half of 2026, federal margins are expected to expand to 9.4%, supported by increased product sales, revenue growth from accretive contracts and contributions from acquisitions.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q2 was 76 dates. The increase in DSO from the prior year period was primarily driven by lower volume on the confidential contract and timing of collections in the Middle East. During the second quarter of 2026, our operating cash flow was impacted by a strategic supply chain investment. We proactively ordered memory and storage inventory for high-margin, high-demand products aligned with national security priorities to maintain critical schedule dates while delivering accretive margins. This working capital investment, together with the timing of customer payments, temporarily impacted our cash flow for this quarter. We expect this investment to generate revenue and cash in the coming quarters and benefit the second half results.

Capital expenditures totaled $16 million in the second quarter of 2026. Looking ahead, we expect CapEx to increase in the second half as we deliver investments in classified facilities and achieved critical milestones related to enterprise systems upgrades to support Parsons' long-term growth and enhance efficiency across the business. CapEx remains well controlled and is anticipated to be approximately 1.5% of total revenue for 2026.

Trailing 12-month free cash conversion was 74%. For the full year, we are reaffirming our conversion target of greater than 100%, reflecting our disciplined focus on collections. During the second quarter, we repurchased approximately 295,000 shares for a total of $15 million. Our capital allocation priorities remain unchanged, and our Board recently increased our buyback authority. We'll continue to invest organically to further differentiate our capabilities, pursue accretive acquisitions that enhance our win rates and ability to capture large pursuits and remain opportunistic with share repurchases.

Turning next to bookings. In the second quarter, we secured $1.9 billion in contract awards, a 24% increase year-over-year, driving a strong enterprise book-to-bill ratio of 1.2x. Through the first half of the year, the book-to-bill ratio was 1.3x, and supporting a favorable outlook as the programs we see funding and are scheduled to ramp. On a trailing 12-month basis, our book-to-bill ratio stood at 1.1x. Both segments had solid bookings for the quarter. Our Critical Infrastructure segment continues its impressive streak with 23 -- with its 23rd consecutive quarter at or above 1.0x, with a book-to-bill ratio of 1.1x, including strong performance in the Middle East, where we also achieved a 1.1x ratio.

In Federal Solutions, contract awards increased 51% year-over-year, resulting in a book-to-bill ratio of 1.3x. Our backlog at the end of the second quarter totaled $9.3 billion. Funded backlog of $6.6 billion increased 6% year-over-year. At the end of Q2, our funded backlog represented 71% of total backlog.

Now let's turn to our outlook for the remainder of the year. We are updating our 2026 guidance based on first half results and our expectations for the balance of the year. This change was driven by the previously described divestitures, joint venture charge and timing. For Fiscal year 2026, we now expect revenue in the range of $6.2 billion to $6.5 billion, adjusted EBITDA between $500 million and $560 million and operating cash flow ranges from $430 million to $490 million. We are lowering the midpoint of revenue guidance by $300 million.

To provide context related to the items impacting guidance, let me walk through the adjustments in three parts. First, $85 million was related to the planned divestitures and which will benefit long-term growth and margins. Second, the anticipated infrastructure ramp has been reduced by $125 million due to lower pass-through costs in North America and timing of new awards. While the lower pass-through has a negative effect on revenue, it benefits the critical infrastructure margins, which continue to deliver above 10% given strong labor growth at mid- to high single digits. Third, the remaining $90 million is impacted by federal contract timing to include a protest on a large new contract award and realized delays of funding on recent contract wins.

Demand remains robust with strong book-to-bill ratios, win rates near 60% and improving margins. Our focus is on delivering solid financial results in the latter half of 2026 and building momentum going into 2027. Adjusted EBITDA and cash flow guidance have also been updated accordingly. Adjusted EBITDA has been lowered to reflect the $118 million in charges, approximately $14 million on lower revenue volume partially offset by $18 million of favorable margin trends, cost controls and program performance across the portfolio. In total, adjusted EBITDA has been lowered by $115 million at the midpoint. Note that the $19 million gain related to the federal ceded divestiture benefits GAAP net income but not adjusted EBITDA.

Operating cash flow has been lowered by $40 million at the midpoint due to the impact of divestitures and revenue time. Our updated guidance ranges and key assumptions, including quarterly cadence and a breakdown of the revision are detailed in our PowerPoint presentation on Slide 16 through 18. In summary, we delivered strong normalized financials in the quarter to include adjusted EBITDA margins, new contract awards and backlog growth. We continue to deploy capital effectively by investing in organic growth initiatives and pursuing strategic acquisitions. These actions demonstrate our disciplined execution, and we remain confident in our ability to achieve our 2026 guidance and create long-term value for our shareholders.

With that, I'll turn the call back over to Carey.

In closing, this quarter demonstrates the continued strength and resilience of our business. We delivered solid results across our core business, including adjusted EBITDA margins, contract awards and backlog while making deliberate decisions that strengthen our portfolio for the long term. The actions we took this quarter to find our company's discipline, we reshaped our portfolio to align with our long-term strategy and redirect resources toward higher margin, higher growth work. We resolved a conflict of interest to unlock greater opportunities, and we absorbed the impact of an extraordinary weather event. These were deliberate decisions, and we've applied the lessons learned directly and permanently.

Since 2019, we have not pursued similar joint ventures, and we only accept work where we have clear control over execution. These are lasting changes to how we operate and they make Parsons a stronger, more resilient company going forward. Parsons is a business with powerful momentum. Demand for our solutions has never been stronger as evidenced by our strong backlog, our robust book-to-bill in both segments and a growing pipeline. These provide a solid foundation for accelerated growth in the second half of 2016 and and build momentum for 2027 and beyond. As I look ahead, my confidence has never been higher. We are in the right markets at the right time with the right strategy and a talented team of over 21,000 people executing with discipline every day.

We've strengthened our foundation, sharpened our focus and position persons to deliver sustained, profitable growth and lasting value for our shareholders. This year, in 27, 2027 and well beyond.

With that, I'll turn the call over for questions. Thank you.

[Operator Instructions] Our first question in queue coming from the line Mariana Perez Mora with Bank of America.

So my first question is on when I think about the underlying business that, as you mentioned, continues to have like strong demand, but also this -- what was the trigger for you to make the decision to, I don't know, like stop the work on this like SETA work or the remote contracts, because I would imagine you have been seeing like headwinds from growth and margins for a while. What changed for you to make this decision?

Yes. Thanks, Mariana. So to your point, the core business is very healthy. The divestitures that we announced are going to improve both long-term quality and margins. They don't affect future earnings potential. The normalized margin was very strong, excluding the charges at $10.2 million. The bookings, the backlog, the funded opportunities we have also support future growth. And then I'd also say, during the quarter, we delivered normalized profitable revenue growth that was in line with our expectations. Middle East performance continues to be strong, and our guidance change is primarily portfolio composition plus timing. So let me start with the SETA contract.

We divested the SETA work because with the intelligence community and a particular customer, you have to either be a developer or a set a contractor -- and if you're in an advisory role, it can have a potential organizational conflict that will restruct our ability to pursue higher value development work. When you look at the opportunity that we have in the development side, it's over 8 to 10x the opportunity we had on the SETA side. So we needed to make a decision which side we were going to play on. particularly with the acquisition of Altamira, this reinforces the strategic logic because of their very strong position with that intelligence community customer.

So from a shareholder value standpoint, it's a favorable trade. We're giving up a modest amount of low-margin revenue and exchange fracs as to a development opportunity that's 8x to 10x larger and has a stronger margin profile. On the second contract, these were contracts initially, we thought that we could execute through self performance. But over time, the operating environment got more challenging, particularly around staffing and supply chain and we ran into some recent challenges with the strates closure. The work is in a very remote location and a difficult one to perform work.

So when these conditions evolve, we assess the risk return profile of the work and concluded no longer, better standards for long-term value creation. We do have -- we also put a new business unit leadership team in place earlier this year that's gone through and reviewed the detailed execution plan. And it was pretty clear to us that self-performing we required a disproportionate amount of management attention.

We have to continue to subcontract. And the bottom line is it was an operating model that just does not align with our strategic priorities or our margin objectives. So the right decision was to pursue an exit and a party that's assuming the work already has an established presence at the location as well as resources and assets. So once again, it's the right thing for long-term shareholder value.

And then going back to the underlying businesses versus some of this, I don't know, like businesses that are prone or just like die, but also the headwinds that you just mentioned on the second half on the infrastructure in North America not ramping up that fast and funding on Federal Solutions also being slower than expected. How should we think about -- and I know it's probably too early to talk '27 exactly, but like when we think like a year or two from here, how much of those headwinds should be over?

Yes. So we've been saying that we would be mid-single digits or better looking forward. And we still expect that off of what we're going to deliver in 2026. From a margin perspective, we expect to deliver 10 to 20 basis points margin expansion. That's on top of 110 basis points of margin expansion we've had over the last two years.

Our next question coming from the line of John Godyn with Citi.

Obviously, a little bit of a complicated quarter. I just wanted to kind of focus on this idea of core businesses being strong. It sounded like when you were bridging the guidance update, some of the delays in funding and timing mismatches are affecting the core business and weighing on EBITDA. I was trying to just square that circle a bit and maybe revisit that bridge and make sure we kind of all understood what was going on there.

Yes. Let me start, and then Matt will jump in. But the guidance revision is about portfolio composition and timing, it has nothing to do with demand. And a portion of the reduction reflects revenue associated with the contracts I just discussed that we're going to divest. Those are, again, deliberate decisions to focus on the long-term quality of our portfolio, the margin profile and management focus. The remaining reduction what you're referring to is largely timing related.

We saw a protest on a large federal contract, which we were awarded $190 million contract over five years, so uncertain as to how long that protest will last. There have been some funding and award timing delays on recent wins. An example, I mentioned the intelligence carry-on program. That one we've been slow to get funding from the customers as well as the other transaction agreements. And then we're taking a prudent view of infrastructure ramp up in the second half based on timing of some new business wins, which we had mentioned in the prior quarter that we're awaiting to receive award. I think what's important to note, since Q4, we've won 13 contracts over $100 million. Six of those are for entirely new work, and 11 of the 13 including all six for new work are within the Federal Solutions segment.

But when you look at the federal environment, it still does remain choppy because of uneven timing with delays associated caused by budget uncertainty, if you look at whether it's the NDAA budget approval, reconciliation bill, the supplemental, potential CR, all those are kind of unknown actions. And then we're still waiting on the reconciliation funds to flow. They indicated that those funds would flow very strong between now and September.

We've seen some uptick on FAA, which we're expecting to have very strong results for the year as well as our teams' contract, but we're still testing more between now and November. There's also some procurement backlogs and workforce constraints within the federal government. So when you look at the underlying business, our bookings, our backlog and our margin all reinforce confidence, and this is really a timing story, not a demand story. and The strength in the bookings is what gives us confidence for the second half of this year as well as 2027 and beyond.

Yes, John, the only thing I would add to that is, as you mentioned, the revenue impact, if you look at the adjustment to adjusted EBITDA, we're coming down about $115 million at the midpoint with the charges in the quarter, about $118 million. That means we're overcoming $20-ish million worth of revenue volume. So we're offsetting that with the outperform on EBITDA. So the underlying EBITDA performance is actually improving, particularly in the critical infrastructure area, where -- about half of the revenue volume reduction within the quarter was related to pass-through effect materials and ODCs, and those come at very low margins. So we've seen particularly strong margins within critical infrastructure. And so we've been able to overcome the effect of the revenue volume.

Okay. I appreciate that color. After a quarter where there are some large charges, I think it's sort of natural for people to worry a little bit whether there's a pattern of charges. Obviously, the nature of some of these events is that they're unpredictable and a surprise. But maybe you guys can comment on your confidence that this is a bit of like a one and done type situation as opposed to the beginning of risk factors that may continue.

Yes. So let me start with the infrastructure program, the one that had faced the weather-related issues. It was a historic once-in-a-century weather event. This is an old program where we're a non-managing partner in a joint venture consortium. This contracts equity and earnings, there's no revenue impact.

In 2019, we made the decision to no longer pursue similar joint venture consortiums like this program was bid under. We strategically changed the focus on design, engineering and program management. when you look at the quality of our portfolio and credit infrastructure, it's the best it's ever been.

And I'll reiterate, this program is nearing completion. We're in our seventh year. It will be 90% done at the end of this year. I think our strategy to revert back to program management and design subcontracts been validated. We have 5 consecutive quarters of greater than 10% margins in critical infrastructure.

Our book-to-bill has been greater than 1.0x for 23 consecutive quarters. Win rates have remained greater than 60% for the past three years. and we've delivered strong profitable organic revenue growth. So I think that kind of answers that one.

With respect to the Federal one, that's an anomaly in our federal business. We have always had very strong operational performance within the federal business. And that was a situation where we had aspired to expand in a geographic location. And without kind of recognition of how difficult it was going to be to manage staffing and supply chain, we are no longer bidding work in that location.

[Operator Instructions] Our next question queue coming from the line of [indiscernible] with Jefferies.

Great. Thanks, Carey. Thanks, Matt. Maybe just on -- I understand the SETA contract issue now with the JV structure. Maybe going back to the Federal Solutions, $77 million. write-down, I guess what resulted in that write-down given it's 1/3 of your full year EBIT essentially? And at what point did you think about divesting the SETA businesses? And is there any other SETA business left in the portfolio?

Yes. So let me start with the SiteOne. We are continually looking at our portfolio for divestitures and exits. I mean we've exited base operation support a couple of years ago in our federal business. exited hard-bid construction in our critical infrastructure business and reverted back to program management and design subcontracting. We're no longer bidding consortium models. In the federal SETA area that we're always looking at. With respect to this intelligence community customer we now with the Altamira acquisition have prime contracts there previously, we were largely a subcontractor.

And we looked at the addressable market for persons at a time where that customer needs very fast, innovative solutions, and we think we're the best company provided. So when you have an addressable market that's 8x to 10x larger. And we, quite frankly, are generally a developer contractor, it just makes sense. I would say the largest kind of remaining SETA program that we have would be the Missile Defense HC teams contract. And relative to that contract, it's important. We've done it for four decades.

It's a critical diver for Golden dome, both the work we're doing on systems engineering as well as our facilities life cycle management work and as well as our test work, and we see substantial growth. And with the Missile Defense Agency, we've made a conscious decision that we are going to stay on the SETA side of the house. but you have to do that on a case-by-case basis with each customer. Relative to the remote contract. This quarter, I would say we really reassessed where we were. We looked at the amount of management time and attention it was taking -- and we thought about the customers' interest and needs as well.

And there was really another company that was already there that was better equipped to perform that work. And with kind of some of the recent issues with supply chain holdups with straighter Horus, we just felt it was the right time to divest that business and exit the long-term strength of the business and also to expand our margin profile over the long term.

Our next question is coming from the line of Gavin Parsons with UBS.

Two-parter. First, just can you help us bridge the second half revenue step-up versus the first half? And then second question, I mean, bookings have been pretty strong for a while. But you've had to cut revenue guide a couple of times in the last year or two. I mean, I appreciate timing is unpredictable. -- protests happen frequently. Funding timing has been wacky under this administration. I mean -- how do you think about guidance so that we can be sure that this kind of is appropriately contemplated that risk?

Yes, I'll start with the bookings, and then Matt will take the bridge to second half revenue. The bookings to your point, really tell you about demand and the demand is very strong when you look at 23 consecutive quarters greater than 101 critical infrastructure. and the very strong federal bookings that we've posted up 51%.

The guidance really reflects the pace of which it's going to convert within a specific window I would say within federal, that's been affected by the protest number one, because we can't predict timing on how long a protest is going to last. And then the uncertainty of federal timing on jobs that we've already won. What we're seeing, it's difficult right now for some of the contracting offices to get federal funding throwing in particular GSA. In critical infrastructure, it's strictly timing of large jobs. When you look at a couple of years ago, we won these multibillion-dollar jobs, whether it was Georgia State Route 400, Hawaii Rail and transit Newark Garitrain.

And those work had peaked as we went throughout this year and last year. Those multibillion-dollar jobs are timing related because they only come up periodically. So we've got several in the second half of this year that we're looking forward to winning, but we're just being prudent in guidance relative to timing on those large jobs.

Yes. And I would just add, Gavin, second half growth, if you look sequentially Q2 to Q3, about 3% sequential growth and then just up a little bit about $20 million from Q3 to Q4 at the midpoint. -- it's kind of a mix of seasonality plus new business. So on the seasonality side, it's really timing on the mine jobs up in Canada. So that's -- as it come out of the winter season, you have a higher, stronger second half traditionally.

On kind of the new business side, you think about programs like [Amo, King Salmon International Airport, some additional scope within Cadia and a lot of the programs we talked about previously. Those are all ramping. And then a little bit on the OTAs as well. We essentially did minimal revenue on those OTAs in the first half that we recently won. And so those have to ramp up as we bring new work to those in the second half of the year.

So it's a mix of kind of seasonality plus new business, but high confidence in that $55 million kind of 3% sequential from Q2 to Q3 and then up just a little bit in Q4.

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

Great. I guess maybe I wanted to ask to start with on -- maybe on cash flow here. So maybe, Matt, you can just help us understand. I heard you reiterate the kind of cash flow target for the year, and that's great. But just in terms of the inventory pull-through on the memory and other things that I think you articulated, if you had to quantify that, can you just help us understand that? And also just noticed here in the first half of the year that your contract assets are up like $158 million. Contract liabilities are about flat. So you're getting paid? Or I'm just wondering like when that reverses, like when is that -- or what's driving that and when that reverses? Just trying to get a better sense of kind of the cash flow here so far year-to-date.

Yes. So to your point, Andy, the biggest -- I'd say the strategic investment was as we get into production on deodorant and other product, everybody heard the stories around chips and memory and things. And so that's a major challenge for everybody. And so in order to achieve committed delivery dates as we enter production on this contract, it was prudent for us to invest ahead of schedule.

And so that was probably $30-ish million of -- in Q2. So the majority of the kind of downward pressure on cash flow within Q2. To your point on kind of the net investment balances were we're seeing an uptick a bit on Middle East. I mentioned in my script, Middle East has been a little bit slower to pay throughout the first half. I've gone directly to customers, along with our President over there, who is -- it's really systems related they have some new cash systems that they've implemented that are delaying some payments. We saw some really strong cash payments at the start of Q3. And so all in all, we see -- if you look at the second half, it's about $350 million worth of cash. So we have a clear line of sight to deliver on that in the second half as these things kind of normalize. And then on the federal side, Andy, I would say we have some milestones and deliveries within federal, that will generate, call it, $50 million worth of cash in the second half as well.

Our next question coming from the line of Jonathan Siegman with Stifel. Just a follow-up on some of the earlier questions. Does the portfolio still have additional non-managing partner programs that we should be aware of? I understand you're not taking any new ones, but are there still additional carryover ones that we should keep in mind could be an attractive business in the long run?

Yes. So there are three where we're the non-managing partner. One of those will wrap up as we go into 2027. The other two, including the weather-related contract, those wrap up and early '28 for one of them and mid-'28 for the other one. And again, these were all contracts we pursued and won back in the 2019 and 2020 time frame. The other two, by the way, are performing well and have executed very well.

Yes. I would just add, John, the -- we've talked previously about kind of legacy programs, the majority of the, I would say, high-risk joint venture structures we're in those legacy programs that are essentially complete, and we're just in the final negotiations on change orders and things. So to Carey's point, significantly derisked from where we were a few years back.

Our next question is coming from the line of Gautam Khanna with TD Cowen.

I was wondering, Matt, maybe if you could just articulate very clearly the $300 million reduction in sales guidance -- could you quantify the various buckets? Because I heard a number of things from pass-throughs to all the issues you raised. Could you just walk through explicitly how much was passed through? How much was contract investments, et cetera, et cetera. Just so I can bridge it.

Happy to do that. So $300 million reduction in revenue guide, $85 million was related to the divest. So that leaves about $215 million of reduction. In infrastructure, it's about $125 million, which you can see in the table that we have on Slide 18 of the of the PowerPoint, but $215 million total spread of $125 million for critical infrastructure and $90 for federal. Of the $125 million, call it, $50 million to $60 million of that is pass-through revenues. So we've seen lower pass-throughs through the first half of the year of about $25 million. So we've extended that to the end of the year, so call it $50 million of lower pass-through, which, to my point in the script as carries with very little EBITDA, so it actually benefits the margins in critical infrastructure.

The rest is, as Carey mentioned, kind of timing on new business. And so if we get some favorable outcomes over the next couple of months. Hopefully, we'll see some favorable new business there, but we'll wait and see on those just because of the timing has been a little bit more unpredictable. When I look at the federal side, if you use, I guess, $90 million of delta. $90 million, about $20 million of that. So 1/4 of it is protest. And then the rest has been timing of IDIQ and task orders and funding, I would say, to summarize.

On work that we've won.

On work that has already in backlog to be executed.

Our next question is coming from the line of Matt Akers with BNP Paribas.

For the question I was wondering if you could talk a little bit more just about what you're seeing in the Middle East right now. It sounds like demand is holding up, but just curious if you're hearing anything different from your customers of the conflict in that region goes on.

Yes. Thanks, Matt. So our first concern in the Middle East is safety and security of our 7,500 employees in the region, and they are all very safe. In fact, when I talk to them every day, it's pretty much business as usual, which is good. As you can see, we haven't seen any slowdown in contract awards reflected by our 1.1x book-to-bill. We also haven't had any force majeure or insurance claims. It's important to note when you look at the ME profile, no program represents more than 1.6% of revenue. And we have 20% of the Middle East is in backlog.

Our average contract duration runs about five years and 49% of the revenue is tied to long-term framework. And 80% of our EMEA business tied to long-term sustainable programs. So what we're seeing still is a focus on the sectors that we participate in, the public investment fund during the conflict just came out with a new strategic profile that runs from 2026 to 2030. It's focused on tourism, travel and entertainment, urban development, advanced manufacturing and innovation, industrials and logistics, clean energy, water, renewables, and we happen to participate in every single one of those areas. Then when you look at post-conflict and I'd even say those discussions are starting now. plan to expand and prioritized areas like how can they have an integrated aero missile, defense system.

In the past, they've typically bought products without looking at a system assistance approach. They're more interested now in border security. We've won a contract, our first border security contract over there. they would like to focus on counter unmanned air systems, credit global infrastructure protection, how do you protect water, utility and data centers from attacks.

So we're leveraging, for example, we've got a lot of water clients, utility clients. We've got 12 data center clients. So we're working with those customers to kind of get started on how we would master plan the security of those and it will come in twofold. One will be kind of an active system like a counter unmanned air system. The other one will be like a passive system where you look at how are you going to secure and harden various assets. And then you look at longer term, we're kind of excited about the rebuild opportunity, which we think has a total addressable market that ranges from $800 billion to $1 trillion. And then out of that total addressable market, we think our addressable market is about $5 billion to $10 billion per year.

There's obviously uncertainty relative to geopolitical tensions, timing and unknowns, but that's currently how we're looking at it with the biggest opportunity being in Syria, which is going to range from about $250 million to $400 million in Ukraine, which is about $500 billion over 10 years.

Our next question is coming from the line of Tobey Sommer with Truist.

I was wondering if you could comment on what your expectations are for contract mix changing between cost plus, T&M and fixed price over the medium term with customers looking at cost plus contracts to see what can be converted and the detail that you provided around OTAs?

Yes. So today, we're at about 55% fixed price time and material -- or 45% reimbursable. We're higher on reimbursable within the federal business and then the critical infrastructure business is higher on fixed price time and material. I'd say it's going to stay pretty consistent. And the reasons our critical infrastructure has kind of always been about 75% fixed price, T&M, 25% cost reimbursable.

Federal is going to stay relatively consistent because we're getting growth on cost-plus contracts, particularly FAA, where we've seen very strong growth in the Missile Defense AC Teams contract where we've also seen strong growth offset by increase in products portfolio. The Joint Cyber Hunt kit is going to be ramping up.

We've just completed delivery of 12 low-rate initial production units. And so we're going to be going into full rate and we need to deliver 62 this year and 74 in 2027 and 74 units in 2028. We also expect our overall products business is going to increase by 30% to 40% next year, and the majority of that resides within federal.

Our next question coming from the line of [indiscernible].

I'll just keep it to one. So Carey, Matt, I understand the breakdown of the reduction in revenue that you've taken. I kind of just want to see how you're seeing the end of the subsidiary shaping up. Usually, there's a fiscal flash. I'm guessing you're not seeing that based on the revenue cut. And then also, how is your guidance sensitized for a potential government shutdown later this year?

Yes. So end of fiscal year, again, and I put the reconciliation, the first reconciliation, Boeing, with that. We started to see some funds flow, particularly FAA and the missile defense agency for the Golden done work. but I would say not some huge flush yet. And part of the challenge they've got with some of the contracting offices is the backlog that they're facing and the workforce constraints that they're up against -- so that kind of remains to be seen how strong that's going to be over the next couple of months.

Relative to a government shutdown, a nice thing with our business, first, 50% of it it's not tied to the federal government. And then the 50% that is we've got very strong backlog, $9.3 billion, 71% funded and we have $11 billion of awarded not booked. So we have a lot of ceiling value contracts that we can drive work to, including the 2 new OTAs that we announced for $400 million. So we can run with for quite a while without having an impact and prior shutdowns, we've seen very little impact to the company.

Our next question coming from the line of Noah Poponak with Goldman Sachs.

I guess at a high level, is it a fair question if there needs to be some rethinking of investor communication and disclosure and balance, I guess, in the way you discuss the business because we had the confidential, then we had the FAA, now we have this. And totally appreciate that it's not easy to run a business and it's complex and guidance is predicting the future, and these things are hard. But I don't remember you discussing wanting to look at portfolio reshaping. I didn't know there was OCI. I'm trying to find you discussing OCI anytime recently. I don't see that -- and I guess the discussion of the business is usually just quite bullish versus some of these potential headwinds. So how are you thinking about -- how are you thinking about that, if at all?

Yes. So first, we do plan to hold an Investor Day sometime next year. So we'll be talking more about that. On the confidential contract, again, that was canceled by the administration. We obviously could not have predicted that. And they gave us no heads up on that. The FDA, I would say we've kind of made out on that because we're under better contract terms under our existing contract. And we expect to realize over 30% year-over-year growth. So I think that's ended up largely in our favor. Portfolio shaping is something we're always looking at. I think any company has to continually be looking at that how do you move to higher growth markets and how do you move to a higher-margin business.

So that's something we're always taking a look at. And we've always had stark, the Missile Defense Agency for four decades, but we try and minimize SETA work where we can because we prefer to be a developer. -- but we are looking at having an Investor Day to further our communications.

No. The only thing I would add, just a reminder is the sale of the SETA work was actually a $19 million gain for us. So that was a favorable outcome. Charges at the remote location that we're going through the divestiture process is really all associated with the risk and the kind of the tolerance around the multiyear risk there. So that's sort of the balance on the two.

Our last questioner will come from the line of Louie DiPalma with William.

Sorry, Matt and Dave I'm interested in like breaking out like the onetime charges versus like the recurring impact from the different divestitures and the write-downs. And it's a pretty simple question, but net for everything -- how much was the second half EBITDA guidance reduced like relative to your prior assumptions that were embedded in the guidance that you issued last quarter?

Second half EBITDA, in theory, would be raised, Louie, on -- so we took $118 million in charges and we reduced guidance by $115. So in theory, the total year EBITDA was raised on core performance despite $200 million in headwind on revenue.

And that's all the time we have for our Q&A session. I will now turn the call back over to Dave for any closing comments.

Thank you. Thanks for joining us this morning. If you have any additional questions, please feel free to contact me directly, and we look forward to connecting with many of you in the weeks ahead. So with that, we'll end today's call. Thank you very much.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

For the fireside chat with Parsons, I'm here with Carey Smith, CEO; and Matt Ofilos, CFO. Thank you both for being here.

Thank you for hosting us, Mariana.

Amazing. So I like on this industrials conference is to start with, can you give us a quick overview for whoever is not familiar with Parsons on what do you do? What are the key markets you work at?

Sure. So Parsons reports in 2 segments: Federal Solutions and Critical Infrastructure, and it's roughly a 50-50 business. We have 21,000 employees throughout the world, 25 countries, all 50 states. And we have 6 end markets that we like to discuss the company in terms of. The first one is Cyber and Electronic Warfare, where I would say we're a distinguished player in how you use cyber and electronic warfare techniques in ways such as non-kinetic effects. And we also do about 75% offensive, 25% defensive cyber. That represents about 21% of the company's revenue.

The second area would be Space and Missile Defense. That's about 14% of our revenue. We are the #1 system engineering and integration company with the Missile Defense Agency, a role that's going to be critical for the Golden Dome program since getting to the flight test by 2028 is really going to require integration of a lot of the existing capabilities that we have. We also provide capabilities in space, space situational awareness for Department of War, the intelligence community as well as Department of Commerce. We do space resiliency of satellite systems, networks, ground systems. We do a lot of ground processing for the intelligence community, and we've done over 170 different ground systems. We also provide the Neptune Software Architecture Ground System for the Space Development Agency, and we're involved in assured positioning, navigation and timing if you lose your GPS signal. You can still get location information.

The third area would be Critical Infrastructure Protection. That represents 9% of Parsons' revenue. Within critical infrastructure protection, we provide capabilities like electronic security systems, biometrics and counter unmanned air systems, where we're protecting 285 embassies and consulates throughout the world. We're also the #1 provider of electronic security for the Army and #3 for the Air Force.

Next area would be Transportation, about 29% of Parsons' revenue. There, we do roads and highways, designed and built over 10,000 miles across 6 continents. We performed over 450 airport projects and actually expanded to 5 new airports within the last 12 months. We've been involved in over 450 rail and transit projects, and we have the largest globally deployed advanced traffic management system in the world. It's called iNET or Intelligent Network.

Next area would be Water and Environment. Water and Environment, we do water -- wastewater treatment plants. We're involved in sewage and drainage programs, a lot of environmental remediation capabilities. But I'd probably say the most exciting part of that market would be PFOS, PFAS, emerging contaminant elimination, which we think is a $40 billion addressable market for the company.

The final area would be Urban Development, also representing about 12% to 13% of the company's revenue. Within urban development, we're involved mostly within the Middle East. We have 7,500 employees that work there. We're on every single giga project that's going on within Saudi Arabia. And some of the most exciting projects in the world, like the world's fastest, longest metro system, the world's largest park, the world's largest entertainment city. So very exciting projects.

So when you think about those end markets, what is driving growth today? And when you think about like 3, 5 years from now, what are the ones that will drive most of the growth?

Yes. So fortunately, we look at it in terms of a 3-year compound annual growth rate. And when you look across those 6 markets, they're all growing between 4% to 11%. I would say Cyber is going to grow the fastest. That's at about a 9% to 11% type of growth rate. Space and Missile Defense runs about 7% to 8% growth rate. Critical Infrastructure protection is about a 5% to 6% growth rate. Transportation is 8% to 9%. Environment -- Water and Environment runs about 7% to 8% and then urban development is about 6% to 7%. So we're in all very good end markets. And I would also add that when we focus on our markets, we really focus on the growth in areas that we can be differentiated technologically wise and really be one of the top players in each of those end markets.

So this is a question I get a lot, especially because most of the E&C companies that diversified into defense solutions spin off that or are in the process of doing that. What makes you comfortable of like having those 2 business units? And what are the synergies you see on having all of these capabilities under the same umbrella?

So I'd say one thing with us is we've made it work. And if you look like '22 to '24, both of our segments, we were one of the industry-leading growth leaders in both of those segments. And last year, without one contract cancellation, we were also one of the top industry-leading growth leaders. So for us, it's really worked and we've driven the synergies. Just a couple of examples. If you look at aviation, we've supported the FAA for over 5 decades and are currently supporting them on aviation modernization, one of our biggest growth drivers, in fact, as we look this year. But we've also done over 450 airport projects. So we leverage a common pool of talent to be able to approach the aviation modernization market.

PFOS, PFAS is another great example. Where on the federal side, we're helping Department of War and the FAA, eliminate firefighting foam. But we're also selling to customers on the infrastructure side, including water customers and some of the customers that have been sued for PFOS, PFAS. I would say another area that I would highlight would be Middle East. When you look at the Middle East, we traditionally had done transportation projects there of Tourism and Entertainment and Urban Development. But we've since moved into defense and security. That's going to be increasingly important, particularly as we come out of the conflict when the Middle East is going to be in need of solutions such as Integrated Air and Missile Defense, Critical Infrastructure protection of areas like data centers, water, utility, counter unmanned air systems, which we're currently providing today and also looking at an $880 billion rebuild.

Yes, that's fascinating. And I want to double tap on a lot of those things, FAA, Golden Dome, missile. But before that, I think it's interesting, and I've gotten a lot of questions right to Matt on like the dynamics for this year. The first quarter was really, really strong from growth and then also a really strong EBITDA, but you are expecting a second quarter that will actually take some hit and then some growth going forward in the second half. What are the specific dynamics that drive that cadence into this year?

Yes. So high level, to your point, came in right on our revenue target for Q1, which was great coming out of Q4 government shutdown. So really excited about the top line performance. On the bottom line, we outperformed margins north of 10% for the first time, really strong first quarter. And so the business performed really well in Q1. We do have 7% sequential growth. But to your point, we're contending against a $350 million headwind year-over-year on the confidential contract that a lot of you know about. Q2 has about $100 million of headwind. So Q3, Q4, you're going to start to see positive growth.

We don't have to talk about excluding confidential program anymore. We'll be back to growing with and without it. And so really looking forward to those days. But Q2, we have about, like I said, 7% sequential growth, about $100 million worth of growth. Then you look at second half versus first half, we have about $400 million worth of growth from the first half to the second half. And it's a lot of the programs that Carey mentioned, the Sealing Tech acquisition we did a few years back and the Joint Cyber Hunt kits. Those kits are shifting from low rate initial production to full rate production in the second half. You think about the FAA work that we're doing, the ramp-up on that ramp, we grew 35% in Q1, tracking to about the same range for the total year, which is amazing on a pretty decent sized base, $150-ish million base.

And then some of the munitions programs that we have key milestones in the second half of the year, plus some of these recent awards that we mentioned, $400 million worth of OTA awards as of late, and those are quick turn. Those are about 3-year contracts, but we've been working build some material and prepping for those contracts for the past 6 months. So those will be quick moving. And so each one of these contributes $40 million to $50 million. So you add up to $300 million out of the $400 million on a very small number of programs. The other one in the Middle East, the King Salman [indiscernible] and those programs are ramping. And so just very clear line of sight to those program growth. And so again, it's just a really very strong view toward the second half of the year. And to your point, looking forward to those positive growth rates for the second half.

Yes, I would add, we have some really good leading indicators, whether it's 22 consecutive quarters of greater than 1.0 book-to-bill within Critical Infrastructure. At the company level, we've always been over a 1.0 trailing 12-month book-to-bill. Very strong book-to-bill for Q1, 1.4 for Parsons for both segments and the Middle East at 1.5. We've got $9.3 billion in backlog. We got 71% of funded backlog. And then we also have $11 billion that's been awarded but not yet booked at Parsons as a single contract for prime contracts. So some really good leading indicators and a $54 billion pipeline.

And when you think about executing towards those contracts, what is the main factor or big factor? Is it labor? Is it clearances? Is it like that money getting funded? Like what are you concerned about when you think about actually executing on those opportunities?

Yes. The most important thing for us is always going to be labor. It's hiring and retention. We're really proud of the fact over the last 2 years, we've had the best retention in the history of the company. And it's not just in one group, it's across all 4 business units. And I think it's a testament that people want to come work at our company because of the culture and because of the exciting projects that they get the opportunity to work on. And then from a hiring perspective, we started off good, but hiring is going to be a critical focus for us as we go through the years, it always is.

Perfect. So you mentioned the Middle East, both of you. I was surprised. One quarter was like the first quarter was really resilient considering all the conflict there for your operations, and you just mentioned like 1.5 book-to-bill. How are operations there? Are there any money getting like refocused to more like defense projects from like urban development? How do you think about that? And then you also have a really strong positioning for anything post-conflict rebuilding. How fast that could happen? How are you thinking about those opportunities?

So I'd say the most important thing for us was making sure our 7,500 employees were safe, and they are all safe. Our employees are all working at the job sites or in the home offices. And our customers have also continued to award. We overdelivered our expectations on revenue and beat bookings, and we beat cash within the first quarter. So those are all very good signs. It's because we're -- I think we're in the right markets, whether it's tourism and hospitality, transportation, infrastructure, and we've moved into defense and security. In addition to the work that we've had ongoing within the Middle East, we've also beefed up our defense capabilities in support of the conflict.

So we're providing support in areas, including cyber, electronic warfare, counter unmanned air systems. Our command and control system is being used for air tasking. We're doing intelligence and operations, center operations 24/7. We're providing early warning capabilities from our Air Base Air Defense system in Europe. So a lot of defense capabilities also that we're providing for that in support of our war fighters. Then post conflict, we see the opportunities in critical infrastructure protection. There's going to be a need to secure hard and potentially underground assets, including data centers, water companies, utility companies, or air bases within the region. There's also going to be continued need for counter unmanned air system and even at places that you didn't have that capability prior.

And then the rebuild area, we see a significant $880 billion across the Middle East. When you ask about starting to get involved, there's things that we can actually be doing now, so we can be looking at anything that would require kind of getting rid of unexploded ordinance, we can look at things like master concept planning. We can start thinking about different security aspects. We can look at ramping up in terms of what staffing going to take, what type of companies do we need to be partnered with. When you look at the duration of the $880 billion, it's estimated that those funds would flow over about a 15-year period. That's pretty similar with what we saw when we did a lot of the rebuild effort in Iraq. That effort for us went over about a 10-year period.

That's fascinating. And you just mentioned air defenses. So like that click on Golden Dome to me because you guys have exposure to a lot of the non-kinetic effects that you can contribute in these like layered structure that is being designed, but also you have a strong relationship with MDA and you were able to also get down selected to Shield despite like the early conflict of interest of going one side or the other. Like how are you thinking about that? Are you seeing opportunities flow there? I think it was in a recent hearing that Department of War said just 20% of the reconciliation bill has been actually kind of like awarded so far. Like it's taken a while. Like how are you thinking about timing of that, exposure to that? And how fast could that play out?

Yes. So first, starting on the Reconciliation bill, to your point, Mariana, Department of War is supposed to get $150 billion and about $20 billion-ish has been spent. So yes, there's quite a bit yet to be spent. We are starting to see Golden Dome expenditures. A lot of that work is in the classified space, which we're participating. I won't discuss that. But I will say we expect our major role to be the integration role. So Golden Dome has indicated that the Missile Defense Agency will be the system integrator for the Golden Dome contract. We are the system engineering and integration company for the Missile Defense Agency.

We currently have over $1 billion in ceiling remaining on our contract, which runs until 2029. The other area that we can play in is the non-kinetic effects. How do you use Cyber and Electronic Warfare to stop incoming unmanned systems or missile systems instead of doing kinetic to kinetic. It's much cheaper, and we have ways that you can do things like potentially address swarms if those should occur. We are in a space-based interceptor team. We're on 1 of the 4 teams. So that will be another role that we'll play. And then we'll see what ends up coming out in terms of Shield capabilities, but we are in that contract as well. So Golden Dome will be a contributor for the company.

Great. And you mentioned system integrator and that also spark FAA to me. After you were not selected for the air traffic control system, like the big contract against Peraton, even being the favorite from a capabilities point of view, that hit the stock a lot. But after that, you got an extension, a system integrator and like with your long-term relationship with the FAA, you also got like to support Raytheon Antennas being integrated like is all lost? How do you think about your role in this FAA modernization that goes beyond that contract that you were pursuing?

Yes. So I'd say the most important thing, FAA has been a customer of ours for 50 years. We've done work at over 1,000 FAA locations. We have hundreds of people supporting the FAA and hundreds of contractors that support us in the FAA's mission. Our most important focus is to make sure the air traffic modernization gets done on time anywhere that we can help. So our current technical support service contract has over $1 billion remaining on it. And the customer, to your point, did exercise over $500 million 3-year option a full year early, which I think is a testament once again to our performance. And we were rated as the technical superior company in the bid of the air traffic modernization.

So I think we're going to be playing a significant role. We've been doing engineering and design. We do site installation. We do a lot of the test capacities and basically work at all the facilities coast to coast. So our work involves all the work streams, whether it's automation, whether it's communication, whether it's surveillance or facilities, we participate in all 4 of those. We expect to have over 25% growth on our core contract this year, but then we're also seeing additional growth. A good example is we had 35% growth in the first quarter, and part of that came through the voice communication switches. So the FAA went directly to the voice communication vendors and then they've come to us. So whatever we can do to help the FAA make sure that they meet all their milestones, our company is going to continue to support that as we have for the last 5 decades.

Perfect. And I'm going to switch gears a little bit towards infrastructure. The Infrastructure bill is about to expire in September, end of the fiscal year. And if this like new surface transportation bill is not introduced and like actually authorized on time, there is a real risk of that flow of funds to actually slow down. How do you think about that? How much is the political risk? How much funds could be awarded from now till September and actually give visibility for multiple years? What are the puts and takes on that risk?

Yes. So the Infrastructure Investment Jobs Act was passed in November 2021. And to your point, it's a 5-year bill, so it does expire this fiscal year. $1.2 trillion, of that $550 billion of that was new dollars. There's only been, as of the end of January, about 60% obligated and about 40% outlaid. So that means there's still a lot of money remaining within that bill. Our estimation is that the peak of outlays is not going to hit until the '27 to '28 time frame, then you're going to have 3 to 6 years expenditure beyond that. So a lot of money remaining from the current bill.

The next surface transportation bill, we're expecting the surface transportation component of that to be somewhere in the range of $500 billion to $600 billion, not too dissimilar from what it was in the IIJA. That bill, I'm not sure will be passed on time with the upcoming elections. However, we do expect that it will get passed somewhere in the 2027 time frame. So you're basically going to be looking at a case where IIJA is still ramping up, and then you'll be adding to that new surface transportation funding.

Perfect. And you just mentioned this timing and midterm elections and what is the risk for that. We get that question a lot. Like investors today are concerned about a continuing resolution, an extended continuing resolution going into '27. What is the new spending level for that continuing resolution? How are you positioned to that? Because on one end, there is a high risk of that continuing resolution to be a long one. But on the other end, you have the reconciliation bill, the reconciliation 1.0 money flowing through the system, the enacted '26 money flowing through the system. A lot of that outlay is still out there. To what extent you need that money to get appropriated versus not to act to keep growing next year?

Yes. So I'd say we're very used to running through CRs. It's unfortunately been going on half of my career for decades. So we know how to live through CRs. And the biggest thing for us, I'd say, first, 50% of our business is not federal government. So that helps us quite a bit from a portfolio perspective. The 50% that is, we've won some good ceiling level contracts. Great example are the 2 other transaction agreements we were just awarded that we announced on the first quarter call for $400 million. So we've got these contracts that have ceiling values that we can drive work to. Within our $11 billion of awarded not booked, half of that amount is ceiling value contracts. So we have $5.5 billion plus the additional $400 million, so we can just continue to drive work, and we don't expect a CR impact from that point in time.

Perfect. And when I think about all these multiple factors, you're also a super acquisitive company. When you think about the pipeline and your appetite, what are you looking for in terms of capabilities or access to markets? What are you looking for when you look at M&A?

Yes, I'll hit on that, and Matt will talk a little bit about our balance sheet and the position that we're in for that. So we have an excellent pipeline. We've done over 17 acquisitions since 2017. The majority of those have been in the federal space. When we buy a company in one segment or another, it doesn't really matter because if we buy a company in federal and we -- it has cyber, cloud, artificial intelligence capabilities, we take those technologies and we use it as an enablement across the entire business. So we've got a very good pipeline. We already closed one deal this year, Altamira, a $330 million deal with a $45 million earnout. That capability adds to our signals intelligence, our Golden Dome capability for missile tracking, missile warning, our ground system processing capability for the intelligence community as well as other efforts. So very excited about that acquisition. So I would say expect to see us do a couple more deals as we go through the year.

Yes. And I'd just add, the balance sheet is obviously in great shape, 2x levered at the end of Q1 after a $330 million acquisition -- all-cash acquisition in Q1. So with $450 million of free cash flow over the next 3 quarters, in really great shape, a lot of capacity to continue to do more.

What are you seeing from a pricing perspective? Because defense and defense tech, you just talked about like [indiscernible] intelligence exposure to Golden Dome. I could imagine that's way more expensive. How do you manage that?

So we've been continuous between about a 10 to 13x EBITDA range. We had one that was about 7.7x. It was on the infrastructure side. But I would say our valuations have been pretty continuous. One reason is we do preemptive deals generally. We like to work with companies in advance, make sure we have the right mission focus, same culture, and then we'll discuss having an acquisition. That way, you have a much better probability of success. I mean it's neat when you look back over some of our recent acquisitions and some of the awards we've gotten as a result of those. We won a $1.2 billion contract with General Services Administration that largely came through our Black Signal acquisition or our Black Horse acquisition.

We've moved into highly classified space work through our Black Signal acquisition, which was very helpful. The 2 OTAs that we just announced, those came largely through our Chesapeake Technology acquisition. Our PFOS, PFAS work over the last 2 years has grown by 38%. That's through TRS acquisition. Our Applied Sciences acquisition in less than a year has already helped us win a lot of water work, which has been our fastest-growing and most profitable market. So I think we've done an excellent job of not just buying companies, but really being able to drive the value out of those companies in a very short period of time.

And then on the Critical Infrastructure side, you also made like critical acquisitions to position 2 key markets. Do you see in the U.S. any state where you're still looking for a bigger footprint? Or how should we think about that?

Yes. We've identified Tier 1 states. And for us, those are California, Texas. New York, New Jersey, Florida and Georgia. So those 6 are really where we're focused. And the reason is based on demographics, they get the most allocation out of formula funds, and there's an effort underway to do more formula funds and less grant funds as we go into the next reauthorization bill. So we'll continue to double down in those states. It's important if you're in a state that you're also in the right cities. So for example, our BCC acquisition, we didn't have a very strong footprint in Miami. So we bought BCC so that we could strengthen our footprint in Miami.

Perfect. And sticking with capital deployment. M&A has been like the priority for you, but how do you think about repurchases? Especially with the price being literally like half from like the early '25 peak levels?

Yes. Without a doubt, repurchase have been a bigger part of deployment. We've -- over the last 2 quarters, we bought back almost $100 million worth of stock, $95 million. So $35 million in Q1. And so we're very interested in the stock at this price, of course. And so balancing the pipeline of acquisition opportunities and leverage and the price, it's just a great opportunity. Last year, we did $125 million. So clearly feel there's dislocation and feel like it's a great return on investment.

Perfect. And you mentioned before in capabilities, AI. Sometimes defense services are put all in the same bag or IT services in general and people are like, okay, AI agents will take over all these jobs and like this is a risk. But on your side, you see it as an advantage because you can actually implement these things as part of your solutions. What are you doing with AI? For how long have you been working with the different versions of AI? And how that makes you more competitive versus less competitive?

Yes. So for us, AI is an enabler to deliver mission outcomes. If we can help our customers get solutions on the federal side more quickly to the war fighter on the infrastructure side to improve quality of life through efficiency of transportation systems, that's a big asset. We've been doing AI for 2 decades. We first developed a system that could counter-improvise explosive devices and video graphics and then an early open source intelligence source -- search tool for the intelligence community. I personally -- my second job out of college was working in an AI laboratory. So I've been personally doing AI forever.

Then you fast forward to today, I'll just give you some representative examples. Cyber, we've been investing research and development on how can we do more autonomous cyber. How do we determine an adversary's next move? How do we figure out if a circuit board has been tampered with? We use it for counter unmanned air systems. How do you identify, detect, track and defeat a UAS that's incoming? On the infrastructure side, we've applied AI to our intelligent network solution. So for advanced traffic management solutions, how do you do it?

That's a great example of where we've been able to increase our revenue while our headcount has gone down. And it's really been through the use of AI and improving our software development capability by 25% productivity. I'd say on the infrastructure side of the house, when I graduated, I was drafting by hand. After I got out of school, my first year, I was using computer-aided design. Then we went to building information modeling, 2D, 3D, 4D, 5D. Agentic AI is just your next step along that journey. It's really a tool. It's an enabler. I always like to say if a customer has $5 to spend, and we can deliver a product or an offering to them with $4. That's great. We just gave them another $1 to spend.

And that's important because the demand is there in every single one of our markets. And if we are always solving our customers' emerging challenges, more than likely that dollar will come back to us in another form. So for us, AI is critical. It's embedded throughout the entire business. We have trained our entire workforce. We developed internal training several years ago. That's been a focus for us. We have our own instantiation of ChatGPT. We have over 6,000 of our employees that are users on that. So it's a critical enabler to win more business. In fact, if I look at the last 10 wins that we just announced since the end of Q4, that were over $100 million. I would say 9 of those had an AI contribution.

And how -- you mentioned about like being more efficient and cost efficient. How that impacts your margins in the long term? And that's a mix with like how you do M&A. If I were to think about the company like that, like 3, 5 years from now, how margins should look like because of these dynamics?

Yes, I'll talk generally about margins. Over the last 2 years, we've seen 110 basis points of margin expansion. That's on the back of really the critical infrastructure business has come out from underneath some challenging programs and delivered 10-plus percent margin 5 quarters in a row. So we're seeing really great performance there on infrastructure. Within Federal, the margins are typically a result of contract mix. So we've seen faster growth in cost type. So you think our FAA contract, you think ABAD, you think all these Missile Defense Agency, all these contracts that are more cost type oriented.

That puts a little bit of downward pressure on the margins within Fed. But as we get toward the latter half of this year and we start to deliver more on products, you start to see the contribution from Altamira at full scale. And the acquisitions that we've done that are all 10-plus percent margin, you'll start to see Fed trend in that double-digit direction as well. So continue to see opportunity within margin. Probably North America within infrastructure will continue to contribute additional margin expansion. And then on the Fed side, we'll see products become a bigger part of the portfolio. And then as there's a possibility of shift to a little bit more fixed price, then you'll see additional margin expansion.

And I would also say through operating leverage, we're able to get margin expansion. All the acquisitions we do are greater than 10% EBITDA. And then back on artificial intelligence, we're not just applying it for external customer solutions, but it's also how we automate and make ourselves more efficient. Matt uses AI, for example, on cash forecasting. Dave can use AI to tell how Matt and Carey are sounding on an earnings call. Do we sound confident, more confident or less confident than the last quarter. We're using it for legal and contracts. We're using it for proposals. How do I make sure that my proposal is more compliant? How do I produce proposals more efficiently? We're using it for hiring. We're using it for recruiting. We're using it for all of our marketing communications. So AI is really going to help us as well.

So between what you mentioned about like a higher products-oriented portfolio and this way of like incorporating technologies that fast, I was always complaining because we always complain on defense. It's never enough. It's like continuing resolution, but actually, there are things that are changing and are changing way faster than they used to. How do you think about like this like fiscal year '27 that asked for $1.5 trillion for all the acquisition reforms we're seeing, the OTAs you mentioned before, how can you benefit from this more agile growing defense spending?

Yes. So I would say for us, again, half our business is more commercially oriented. So I like to look at us as a nontraditional company. And when you look at our federal business, it was purpose-built starting in November 2016. At that time, we really only had the missile defense business. So our Cyber business, I mentioned, 21% of the company's revenue today didn't exist. Space and missile defense, 14% of the company basically has grown up since that point in time in the critical infrastructure. So because we're purpose-built, we built a company that is very agile, that is very commercial oriented and nontraditional. So we're in the best place, I think, to capitalize on things like OTAs.

We currently have over 30 other transaction agreements across the entire company. We're advertising our product offerings on commercial solution offerings. We believe in all the acquisition reforms that are underway in terms of how do you streamline the far and make things more efficient. But I would say we're a commercial company at heart, and our focus is getting solutions out as quick as possible for our war fighters.

And do you think that the signal towards where the requirements and needs are, are strong enough for you to actually put your own dollars and investment towards those?

Absolutely. I mean, when you look at the defense budget, $1.5 trillion in the base that's proposed for FY '27, whether it's $70 billion that's going into drone dominance, counter unmanned air systems, $60 billion going into space, $58 billion going into JADC2, artificial intelligence, $48 billion going into critical minerals. We got $20 billion that's going into cyber. We got $11 billion going into Pacific deterrence. It aligns perfectly with our portfolio, and they're all areas that we have been investing in, many of them since we started research and development investment back in 2016.

Perfect. And to close, I always like to know like what is it that gets you most excited about the future and what actually keeps you up at night?

So I would say most excited about the future are the strong tailwinds. We're very fortunate to be in 2 growing thriving segments that have bipartisan support and global demand. We're also in 6 end markets that are growing between 4% to 11% over the next 3 years. We have a proven ability to show that we can be one of the industry leaders in organic growth within both of those segments. What keeps me up at night? I think it'd be mostly any unknown unknowns or unpredictables.

Well, thank you both very, very much for being here.

Thank you. We really appreciate it, Mariana.

Thank you for standing by, and welcome to Parsons Corporation's First Quarter 2026 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, David Spilly, Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today to discuss our first quarter 2026 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Apoulos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our first quarter financial results as well as a review of our 2026 guidance. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2025, and other SEC filings.

Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for the comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. And now I'll turn the call over to Carey.

Thank you, Dave. Good morning. Welcome to Parsons' First Quarter 2026 Earnings Call. I want to begin by recognizing the dedication and performance of Parsons' more than 21,000 employees who delivered a strong start to the year. Most importantly, I'm pleased to share that our 7,500 team members in the Middle East region have remained safe during the current regional conflict. They've shown tremendous resilience in managing volatility while continuing to deliver our customers' critical missions. As we'll discuss later in the call, our Middle East business produced solid financial results this quarter, and I am very proud of what the team has achieved.

As demonstrated by the current military operations, our differentiated solutions spanning cyber, electronic warfare, air-based defense, countermanned aerial systems and intelligence and operations centers are vitally important to protecting both our nations and our allied security. Post conflict, Parsons is prepared to support the Middle East on its path to recovery by providing essential capabilities, including critical infrastructure protection, air-based defense, integrated air and missile defense, transportation solutions and the reconstruction of conflict-affected areas. We believe Parsons is well positioned to advance allied priorities with our nearly 70 years in the region, extensive footprint and performance reputation.

We are proud of the work we do in defense, security and infrastructure for our global customers. The first quarter highlighted the resilience of our business and our team's high level of execution as we delivered our highest adjusted EBITDA margin ever, reached record levels for both total and funded backlog, achieved a robust book-to-bill ratio of 1.4x in both segments and generated record first quarter cash flow. Revenue performance was in line with our expectations, and we continue to complement our organic growth with strategic accretive acquisitions that enhance our differentiation and drive long-term shareholder value. Looking at our first quarter financials in more detail, total revenue increased by 8% and organic revenue grew 3%, excluding our confidential contract.

This total revenue growth was driven by 12% growth in our Federal Solutions segment and 3% growth in Critical Infrastructure. Our record adjusted EBITDA margin of 10.1% was driven by a 10.8% margin in Critical Infrastructure, marking our highest first quarter performance in that segment. The 50 basis points of margin expansion at the corporate level in Q1 builds on the 40 basis points of expansion we delivered in the first quarter of 2025. In addition, we significantly exceeded our cash flow target and closed the quarter with record total and funded backlog of $9.3 billion and $6.6 billion, respectively.

On the bookings front, contract awards increased 17% year-over-year, resulting in a strong book-to-bill ratio of 1.4x. Our Critical Infrastructure segment reported a book-to-bill of 1.4 for the quarter, marking 22 consecutive quarters above 1.0. Performance in the Middle East was outstanding with a book-to-bill ratio of 1.5. In Federal Solutions, contract awards increased 38% year-over-year, resulting in a book-to-bill ratio of 1.4x. These strong bookings provide a foundation for continued organic growth in both segments. A key driver of our future performance is the strategic importance of our contract wins. During the first quarter, we secured 4 single award contracts valued at more than $100 million.

These included a $593 million contract extension under the Federal Aviation Administration's Technical Support Services or TSSC 5 contract with $410 million booked in Q1. This award exercises the first option period, extends performance through 2030 and supports the FAA's aviation system capital investment plan. TSST V has a $1.8 billion ceiling value with a 4-year base period and 2 3-year option periods. We received a production award notification from the United States Cyber Command for the Joint Cyber Hunt Kit solution, a new sole-source contract with a ceiling value of up to $500 million with $250 million booked in Q1.

Importantly, this contract was another transaction agreement, which allows for faster, customized and collaborative industry partnerships. Parsons is an industry leader in the use of these rapid delivery vehicles. We were awarded a new 5-year contract valued at over $340 million to provide program management services for a major transportation project in the Middle East, booking over $300 million in Q1. Our transportation work in the region spans rail and transit, roads and highways, bridges, airports and intelligent transportation systems.

We were awarded more than $145 million under the Garden contract. Under these task orders, Parsons will enhance command and control, space and intelligent surveillance and reconnaissance technologies for the Air Force and other federal customers. We will develop and sustain next-generation software, deliver on-site training and rapidly deploy advanced mission applications. We booked $38 million on these contracts during the first quarter. We also received an additional $150 million on 2 contracts to continue serving as the main construction manager for remediation projects on the Faro mine and giant mining programs in Canada, 2 of the largest and most complex mine reclamation projects in the world.

We booked the full amount on these contracts during the first quarter. After the first quarter ended, we received 4 more strategic federal awards previously unannounced. First, we were awarded $400 million for 2 other transaction agreements, each having a 3-year period of performance. This new work shows the continued demand for our mission-critical defense and intelligence capabilities and our ability to deliver solutions to our national security customer base rapidly.

Next, we were awarded a single award classified IDIQ contract with a ceiling value of $184 million over 7 years that represents entirely new work for the company. We were awarded this contract based on our differentiated technology, including our unique biometrics capabilities. And finally, we were awarded an $87 million increase on its current national security prime contract. Importantly, in all of our Federal solution wins, we are leveraging our artificial intelligence capabilities to enhance our solutions and create differentiated outcomes. I would now like to highlight some additional accomplishments during this quarter.

We closed our acquisition of Altamira Technologies Corporation in an all-cash transaction valued at up to $375 million. Altamira advances high-priority national security mission supporting intelligence community and Department of War customers by providing multi-intelligence technology solutions and performing critical operations. Altamira expands Parsons' market presence in signals intelligence, missile warning, space and foreign military exploitation and adds critical customer depth with the National Air and Space Intelligence Center, National Security Agency and other classified intelligence customers. We were named one of the World's -- most Ethical Companies by Ethisphere for the 17th consecutive year, and we were honored for our project excellence on 2 major infrastructure initiatives. In Georgia, our team received the Engineering Excellence Honor Award from the American Council of Engineering Companies for the ARS Mill ramp extension in Cobb County.

Internationally, we were recognized with the Refurbishment and Retrofit Project of the Year at the Big Project Middle East Awards for our work on the King of Dolo Financial District residential uplift project. Looking forward, we are optimistic about Parsons' future. The synergies between our Critical Infrastructure and Federal Solutions segments across 6 growing, profitable and enduring end markets set us apart and create significant opportunities for us to meet or exceed our financial goals.

In Critical Infrastructure, we continue to see strong demand in both North America and the Middle East. Our focus on hard infrastructure, roads and highways, bridges, airports, rail and transit and intelligent transportation systems is aligned with the spending priorities in these geographies. Also, there's a need for urban development, support to major events and advanced manufacturing that match our core competencies. Our #1 ranked program management, #3 ranked construction management and AI-enabled solutions underpin our success. While we continue to monitor geopolitical developments, including the ongoing war in Iran, our momentum and our customers' commitments to advancing their projects forward give us confidence in continued growth. Although our business has not been affected by the conflict to date, our customers remain focused on ensuring their budgets are aligned with the right priorities and their programs are properly phased.

Across the Middle East, the emphasis on diversifying economies, hosting major global events and addressing defense, security and infrastructure requirements is expected to continue driving demand for our expertise. Turning to Federal Solutions. We are encouraged by the momentum in the United States defense spending. In fiscal year 2026, $1 trillion has been appropriated for defense, and we're beginning to see funds flow from both the base budget and reconciliation industry. For fiscal year 2027, the administration has submitted a $1.5 trillion defense budget comprising a $1.15 trillion base and $350 billion of reconciliation funding.

This proposed 44% increase over current funding levels, which is focused on modernization, would represent the largest defense budget in history. The fiscal year '27 budget presents substantial opportunities for Parsons that are closely aligned with our strengths, including missile defense, cyber, space, counter unmanned aerial systems, electronic warfare, facilities modernization, critical minerals, countering weapons and mass destruction and joint all-domain command and control. Our purpose-built Federal Solutions portfolio is aligned with our nation's defense and security priorities.

And because of our strategic acquisitions and sustained research and development investments, we've built differentiated capabilities that help safeguard our nation and outpace evolving threats. We are encouraged by the strong bipartisan commitment to increasing U.S. defense spending in response to the evolving global security challenges. Our leading indicators, including our $54 billion pipeline, strong win rates of 60%, total backlog of $9.3 billion, of which 71% is funded and our $11 billion of contract wins not yet booked, give us confidence that we will continue to remain an industry growth leader, excluding the impact of our confidential contract in both segments.

We operate in 2 large and well-funded segments across 6 end markets, and our favorable financial outlook is supported by our proven execution and effective capital deployment. We are reaffirming our 2026 guidance ranges, which Matt will review shortly. In summary, we had a strong start to the year, delivering new records for adjusted EBITDA margin and total unfunded backlog, exceptional book-to-bill ratios in both segments and record first quarter cash flow. Our operational discipline, strategic contract wins and additional corporate achievements reinforce our position as an industry leader. We remain optimistic about our future and are confident in our ability to drive long-term shareholder value.

With that, I'll turn the call over to Matt to provide more details on our first quarter financial results. Matt?

Thank you, Carey. We've started 2026 with solid results and favorable forward-looking indicators towards future growth. With a strong book-to-bill in both segments, record adjusted EBITDA margins and our highest total and funded backlog to date, we are well positioned to deliver for our customers and shareholders. We continue to effectively deploy capital, investing in strategic acquisitions, internal research and development and increased share buybacks, all to support long-term growth and create shareholder value.

Turning to the details of our first quarter results. Total revenue grew 8% and 3% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection, space and missile defense and transportation markets. Highlights included strong growth on key contract drivers for the year, such as Airbase Air Defense and the FAA-TSSC5 contract. Total revenue, including the confidential contract decreased 4% from the prior year period and was down 8% on an organic basis. SG&A expenses for the first quarter increased 10% from the prior year period, primarily driven by costs related to recent acquisitions and higher transaction expenses.

Record first quarter adjusted EBITDA of $151 million increased 1% from the prior year period. Adjusted EBITDA margin expanded 50 basis points to a record 10.1%. The -- these increases were driven by improved execution and contributions from accretive acquisitions. I'll turn now to our operating segments, starting first with the critical infrastructure, where first quarter revenue increased by 3% from the first quarter of 2025. This increase was driven by organic growth of 2% and inorganic revenue contributions from our TRS and Applied Sciences acquisitions. Organic growth was primarily driven by strength in the global transportation markets.

As a reminder, Middle East revenues were negatively impacted by the number of work days in Q1 given the holiday schedule compared to 2025. We expect this to resolve in Q2 where there are 3 additional workdays compared to the prior year. Critical Infrastructure adjusted EBITDA of $79 million increased 8% from the first quarter of 2025 and adjusted EBITDA margin expanded 50 basis points to 10.8%. Both adjusted EBITDA dollars and margins were first quarter records for critical infrastructure. These increases were driven by the ramp-up of recent awards, accretive acquisitions and strong program execution.

Moving to our Federal Solutions segment. Our first quarter revenue increased 12% and 4% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection space and missile defense and transportation markets. Total Federal Solutions revenue, including the confidential contract, decreased 10% from the prior year period and 17% on an organic basis. Federal Solutions adjusted EBITDA decreased 5% from the first quarter of 2025, while adjusted EBITDA margin expanded 40 basis points to 9.4%. The adjusted EBITDA dollars were primarily impacted by lower volume on the fixed-price confidential contract. The adjusted EBITDA margin increase was primarily driven by accretive contract growth and acquisitions.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q1 2026 was 72 days, a 14-day increase in the prior year period. This increase was primarily driven by lower volume on the confidential contract and timing of collections in the Middle East. During the first quarter of 2026, we used $4 million of operating cash, which was an $8 million improvement from the prior year period. Capital expenditures totaled $15 million in the first quarter of 2026.

Looking ahead, we expect CapEx spend to ramp in Q2 as investments in classified facilities and upgrades to our enterprise systems accelerate Sport Parson's long-term growth and drive greater efficiency throughout the business. Trailing 12-month free cash conversion was 102%, reflecting our disciplined focus on contract execution and collections. Our balance sheet remains strong as we ended the first quarter with a net debt leverage ratio of 2.0x. This includes the impact of the upfront cash consideration of $330 million for the acquisition of Altamira in the quarter. During Q1, we repurchased approximately 583,000 shares for an aggregate purchase price of $35 million.

Turning next to bookings. In the first quarter, we secured $2 billion in contract awards, a 17% increase year-over-year, driving a strong enterprise book-to-bill ratio of 1.4x. On a trailing 12-month basis, our book-to-bill stood at 1.1x, which extends our track record of a trailing 12-month book-to-bill of 1 floor grader for every quarter since the IPO. Both segments reported a book-to-bill ratio of 1.4x for the quarter. Our Critical Infrastructure segment continued its impressive streak with its 22nd consecutive quarter above 1.0, with particularly outstanding performance in the Middle East, where we achieved a book-to-bill ratio of 1.5x.

In Federal Solutions, contract awards increased 38% year-over-year. Our backlog at the end of the first quarter totaled $9.3 billion, a 3% increase from the prior year period. Funded backlog of $6.6 billion remains the highest since our IPO and increased 7% year-over-year. At the end of Q1, our funded backlog represented 71% of total backlog. Now let's turn to our guidance. We are reiterating our 2026 guidance ranges provided on February 11 and based on our financial results for the first quarter of 2026 and our outlook for the remainder of the year. These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website.

On Slide 11 of our PowerPoint presentation, we also include other key assumptions in connection with our 2026 guidance, including quarterly cadences. 2026 guidance reflects the evolving budget environment, a competitive labor market and reality is of a challenging government procurement landscape. While these factors present challenges, we're also benefiting from the tailwinds, including unprecedented global infrastructure spend, federal portfolio that's tightly aligned with the administration's priorities, recompete risk of less than 3% of 2026 total revenue and a record $9.3 billion in total backlog, including our highest funded backlog ever.

On top of that, we have $11 billion in awarded contracts still to be booked, which further strengthens our outlook. We've lowered second quarter expectations due to the timing of recent wins. However, we continue to believe strong backlog and recent awards are supportive of growth projections in the full year guidance. In summary, we delivered strong results for adjusted EBITDA margins, contract awards total unfunded backlog and our revenue was in line with expectations despite a complex global environment. We can continue to deploy capital effectively, investing in organic growth opportunities, acquisitions, share repurchases to support our growth strategy. All of this reflects our disciplined execution, and we remain confident in our ability to achieve commitments and create long-term value for our shareholders by delivering critical capabilities for our customers around the world.

With that, I'll turn the call back over to Carey.

Thank you, Matt. This quarter's results underscore the strength and durability of the person's portfolio with a robust pipeline, high win rates, strong book bill performance in both segments record levels of total and funded backlog and $11 billion and contract wins awarded yet to be booked, we are confident in our outlook.

With that, we will now open the line for questions.

Certainly. And our first question for today comes from the line of Sangita Jain from KeyBanc.

First of, Carey, it's really good to hear that all your Parsons team members are safe and you had very strong 1Q results. Can you elaborate on some of the conversations you may be having with your customers about the balance between the short-term disruptions and the long-term opportunity?

Certainly. Thanks, Sangita. I appreciate your question. As you mentioned, our first concern is always for the safety and security of our employees, and all 7,500 are safe and secure. Most importantly, all the employees are working on the job sites and in the offices. We really have not seen an impact to date. I will point out too, the contract has not delayed any of our funding. The Middle East exceeded their first quarter cash forecast. We have not seen any slower contract awards or positive negotiations that's clearly reflected by our strong 1.5x book-to-bill. And we've not had any force majeure insurance claims.

One thing that's good about our portfolio is that no Middle East program represents more than 1.6% of our revenue, and we have 20% of Middle East backlog. The contracts are pretty long in duration as well. The average contract duration is 4.7 years and 49% of our revenue is tied to long-term frameworks, and we're clearly holding our full year guidance for the Middle East of 8.5% organic.

What we're seeing, Sangita, to your question is many of the GCC countries are using the periods of high oil prices to fund diversification into non-oil sectors and advanced technologies such as artificial intelligence and digital infrastructure so that they're less vulnerable to future price swings. I do want to point out that post conflict, we believe there's going to be significant investment in areas, including redundancy and resiliency. So not only will Parsons be doing our traditional areas of transportation, water and environment and urban development, but we're going to expand into prioritized areas, including integrated air and missile defense, border security, counter unmanned air system, critical infrastructure protection, water security and desalination, rail, pipeline security and rebuild opportunities, and there's also a priority to take key assets into hardened underground facilities such as data centers, treatments plants and military assets.

Just reported on the defense front, it was April 27, the Arabian Gulf business indicated that the defense spending in the Middle East is expected to rise by 20% over the next 3 years.

That's super helpful, Carey. And maybe one for Matt. Can you talk about some of the puts and takes that went into your guidance since you're FS margins have recovered really well and your CI margins are very strong, but you decided to keep the full year margin outlook unchanged. Can you help us walk through that?

Yes. Thanks, Sangita. So to your point, really strong Q1 at north of 10% margin, 10.1%. CI now has 5 straight quarters, north of 10%. So the performance here has been a really strong obviously, still early in the year, 9.7% is 10 basis points this year, but on the back of 110 basis points over the last couple of years. So we're still bullish on our margin expansion opportunities over the next couple of years. But obviously, we want to be thoughtful. It's still early in the year. When we look at Fed, Fed is 9.4% in Q1 were high 8s, low 9s is kind of a target for us for the year. And then infrastructure, we're 10.5% at the midpoint. So 10.8 to start the year is a little bit better than total year expectations.

But obviously, early in the year, we will expect within federal, we'll have some additional growth and cost types. We've talked previously about mix is always the biggest driver to Fed margins. And then on the infrastructure side, we had a little bit lighter pass-throughs and materials in Q1. So a little bit of pressure there on margins. So again, early in the year, a great start to the year, but we'll watch over the next couple of quarters.

And our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Maybe Carey, can you just talk about -- the Middle East seems okay. But aside from that, how do you think about the first half versus the second half growth trends? What's really driving the upswing in the second half and some of the major program drivers there.

Yes. Thank you very much, Sheila, for the question. I appreciate it. So both we anticipate both of the segments to grow within the second half of the year. What's driving it? Let me start with federal are the new awards. We just highlighted the 4 awards, 3 of which were federal that occurred during Q1 and then the 4 awards that have already occurred after Q1 ended. So very strong start to the year for federal -- also seeing significant growth on FAA. FAA, we achieved 25% growth in the first quarter, and we expect the FAA to be strong throughout the year. So I would highlight besides the awards I mentioned during the call, areas such as munitions, Holston and programs are ramping up. Also, a lot of classified work and other transaction agreements FAA and then our Missile Defense HC teams contract, which we expect to achieve over 10% growth this year as we're supporting the important Golden Dome program.

Within the Critical Infrastructure segment, I mentioned the Riyadh metro, so we expect that to have a ramp-up in the latter half of the year. Within the North America group, we expect P3s, particularly on the East Coast to ramp up. And then we had some recent wins on the West Coast, including the LA Metro line A extension of the i70 in Missouri and the silver line in Texas, and probably a couple of other programs, I'll highlight in the Middle East would be the Entertainment City as well as King Salmon International Airport.

Yes. And Sheila, the only other one I would add that as we've talked previously about the Joint Cyber Hunt kits through ceiling tech that program is an LRIP, as you know. And so second half will transition to production and have some critical deliveries before the end of the year. So that's also benefiting in the second half.

Got it. And maybe to follow up, Matt, on that. You said Q2 is a little bit lower given award timing. Can you just give us a little bit more color on that? What are you seeing in the outlay environment? Why was it lower?

Yes. So some of the awards that Carey highlighted that came in, started were kind of expected earlier in the year, call it, January, February, so we thought we'd be ramping on those. Additionally, some phasing within the Middle East. Middle East makes up about half of the reduction to Q2. So that's really just phasing as we see the customers' prioritizations. -- again, the second half ramp on those awards is going to benefit the Middle East business. But overall, again, the reductions are really kind of just phasing and timing of awards.

And it's super exciting to see the federal momentum that we had.

Our next question comes from the line of John Godyn from Citi.

Maybe we could just revisit the $1.5 trillion budget. You described it as a generational investment, well aligned with the Parson portfolio. Could you just elaborate on what's most exciting there for you? And then sort of a quick follow-up to that. Obviously, there's some concern about the $1.5 trillion budget going through you guys don't have a perfect crystal ball, but any thoughts on how that may play out as we just sort of form our own views.

Yes. Thanks, John. I appreciate the question. As you mentioned, it is exciting. It is a generational investment. It's been recognized on a bipartisan basis that we're facing with the most complex and dangerous threat environments in our nation's history with adverse series advancing capabilities. And so the need for that budget is there. the budget is focused around 3 pillars, and I'll kind of hit on where persons plays in each of those pillars. The first 1 is super charging Americas defense and industrial base. So while that pillar talks about shipbuilding and air power also within that pillar is a focus on critical minerals onshoring and energy independence and emerging technologies, both areas where persons place.

There probably is most important to us is the second pillar, securing America's military advantage in the whole land. Counter unmanned air systems and economy are going to see big increases of greater than $70 billion on the top line for drug dominance and counter unmanned air systems. The specific insurance initiative is going to increase from $10 billion to $11.7 billion and $3 billion of that is aligned to infrastructure improvements.

In cybersecurity, there's going to be over $20 billion of additional funding. There's artificial intelligence, $58.5 billion of investment in AI as well as showing all the command and control. And then there's going to be a significant hike in both procurement and research development and technology overall, particularly in the space area, which could be more than double the 2026 enacted level. Missile Defense is a budget priority, Missile Defense agencies to receive $17.9 billion.

And then if you look at Golden Dome to receive $17 billion, that would be within the budget. The next pillar focuses on securing America's military witness, and we play in 2 areas there. The first one is modernizing the nuclear triad. We're involved in nuclear command control and communications -- and the second area is in improving the infrastructure for our riders, which is right up our outlook.

So overall, I'd say looking at a procurement increase of 85% in RD&T increase of 63% is good. As you mentioned, it's not for certain. And I'd say, in particular, the discussion right now is over the Reconciliation Bill. Reconciliation 2.0 is moving forward, but the future is not real clear yet. Speaker Johnson is planning on a floor boat sometime this week, which would be based on the Senators -- the Senate budget resolution. But there's a discrepancy between some of the house republican, someone add additional items that are election related and additional DHS provisions. In other words, Republicans are recommending that the skinny vote basically be passed. So I would say this week, we expect the next step on the reconciliation to see whether or not the Senate House do pass the identical reconciliations, which would move that go forward.

That was excellent. And if I could just ask 1 totally separate question on M&A. You guys closed 3 deals in the last 12 months and a relatively large 1 just recently -- can you just refresh us on M&A pipeline thoughts from here? And how we should be thinking about the M&A strategy maybe for the next 12 or 24 months?

Yes. Thanks, John. So M&A remains our #1 focus for capital deployment. As you mentioned, we closed 3 deals last year, followed by a deal, the first quarter of this year. We anticipate this year will close between 2 to 4 deals -- we've got a strong pipeline in both federal and critical infrastructure. We continue to keep our borrower growing greater than 10% on the top line, greater than 10% EBITDA margin. We're continuing with our strategy of preemptive as well. We like to get with companies that we know well that we've worked with. We have a similar mission and culture. And that way, we're more certain for success after the integration of those assets.

So you can expect to see us continue to focus of our capital on M&A. I think it's been a significant differentiator for the company. In fact, as I look over those -- the federal wins that I cited on the script, I would say many of those are due to the fact of our revenue synergies that we've been able to drive across the federal business.

And our next question comes from the line of Andrew Wittmann from Baird.

I just -- Matt, I just wanted to help understand the quarter a little bit better. The holiday timing in the Middle East, how did that affect? Can you quantify the effect or estimate the effect on the growth rate in the CI segment for the quarter? And then how much of the benefit you're going to pick up here in the second quarter. Just to understand that moving -- those moving pieces a little bit more clearly.

Yes. It was about 3 days from Q1 to Q2. So think of it as $10 million to $15 million of impact. So -- we had a little bit of a headwind in Q1. A nice part for when we originally guided to first quarter for Middle East, we're expecting flattish to down a bit. It actually came in up 2.5%. And -- and so a little bit of a strong start to the year for the Middle East and some tailwinds into Q2. .

Got it. Okay. And then, Carey, on the $11 billion of awarded but unbooked, that number has been pretty steady there. Is that getting worked down? And then just going to replenish to the same level? Or is it kind of stagnant? I'm just kind of curious as to the dynamics of what's going on in there?

Yes. Great question, Andy. So what we did is we moved the FAA work, which we look for 410. So that basically moved down to way were to not book as you saw by announcements that we made or the stuff that we've already won post Q1, we're going to be well over that. So that number is going to go right back up as we go into the next quarter. I think the important thing as well is to look at our book-to-bill ratios, which very strong again across the board, 1.4 for persons, 1.4 for federal and critical infrastructure and our backlog of $9.3 billion and then add to that $11 billion, and again, the $11 billion, to your point, is going to be replenished by these new awards.

Okay. And then I guess maybe just 1 final thing. Just on cash flow, Matt, your contract assets number, so your unbilled -- or contract assets, cash that you've got or that you don't have, that work that you performed is up a decent amount. Maybe you could just drill into that a little bit. Is this a certain types of work that you're starting to perform in greater amounts today? Is this a geographic thing with somebody that you're working for and have that asset it stick out with the DSOs up a little bit. Obviously, there's a seasonal effect there. I mean just digging into some of these working capital pieces are -- would be interesting to understand those dynamics. .

Yes. Good question, Andy. So to your point, DSO was up about 14 days, which is a good number. And so overall, really happy with the cash performance in Q1. We do have a higher balances. A lot of it is related in the federal business to milestones on some of the munitions projects that it will deliver over the next 2 quarters. So I expect a number to come out over the next 2 quarters. I don't think it will continue to expand. I think when we get into production on the Cyber Hunt kits, we may have a little bit of fluctuation, but not to the same scale. So I'd say the biggest driver has been the munitions programs and the upcoming milestones there.

And our next question comes from the line of Gavin Parsons from UBS.

Carey, how big is your UAS business? And are you seeing any accelerated procurement yet given Mideast learnings?

Yes. So the big part of the kind of UAS, we have 2 components. One is our non-kinetic business. and that mostly goes through the Army 10 cap program. And as I mentioned, it's deployed in the Middle East right now. The second part of it is our drone arm, which is a system of systems. And that's basically -- it's a technology readiness level 9 that's been deployed. It is currently deployed in Laredo on the southern border. So if I pull those 2 components out, I would guess probably $100 million-ish, if I had to make an estimate.

Yes, we see growth as far as -- we see future growth as far as the Middle East. So we were brought in the Middle East originally to fix another company system that was not working. So our system had basically replaced that. And there's ongoing demand. We also see demand within the United States. There's a couple of procurements that were waiting on award from Department of Homeland Security and Customs and Border Protection and the Coast Guard.

The ABD contract, I think that might also possibly fall in that category. I mean is that just Europe and Africa? Are there other geographical opportunities?

Yes. That's a great point, Gavin. I didn't include that in the number. I just threw out, but they are based here defense contract. That's roughly $1 billion over 5 years, and we're on a run rate to achieve that. So air system, it's much higher. We think air-based defense is going to continue to increase within the region as well as within Endo Paycom. Our contract within Europe has rapidly expanded. It's currently being used for early morning for the Middle East activities.

And our next question comes from the line of Gautam Khanna from TD Securities.

I was wondering what's the latest on the FAA program, that Peraton 1. I didn't know if much work has come your way yet and what's your latest expectation on that?

Yes. So just to recap, we've been supporting the FAA for over 5 decades. We've supported them for 24 years on the technical support service contract. The FAA just issued our extension for 3 years, 1 full year early. -- indicating their intent to fully use that contract. Under that contract, we provide engineering and design support, installation, integration services. We do project structure management and also technical logistics and field support.

Importantly, we've supported about 1,000 FAA sites. So we have people pretty much everywhere embedded in the facilities and equipment work that occurs with the national aerospace system, whether it's radars, navigation aids, communications, surveillance, automation towers. We do the terminal radar approach control system, they're about traffic control centers and much more.

Our FAA revenue, as I mentioned, is projected to grow at 25% this year. On just the TSC contract and we were at 25% for the first quarter. We also had additional growth in on areas like voice communication switches and some contracts that we have outside the TSSE putting us at around a 35% growth rate. In addition to the legacy work that we've performed on the DSSC, we're starting to perform work for the implementation of the new air traffic control system. And that work includes voice communication, automation and training systems. We've been working very closely with Peraton. We have an associate contractor agreement as well as with the FAA, both the FAA and Peraton when to continue to use Parsons as the implementer for that work.

And I just wanted to also circle back to the Q2 commentary. It sounded like bookings have been pretty strong to start the quarter. What would you expect, do you have a view on what book-to-bill could be in the second quarter based on what's in the pipeline and what you've already been awarded?

Yes. To your point, Gautam, really strong start to the year. We are expecting north of 1.0 again at the Parsons level in Q2. .

Okay. And within the segments, is there any SKU is 1 particularly strong relative to the other?

Not really. I think they'll both just be around 1 or better. I don't think we'll see another 1 another 14 necessarily, but I think they're both in a good place to be north of 1.

And again, critical infrastructure, 22 consecutive quarters greater than 10% and our trailing 12 months as a company has been over 10 since IPO.

Great. And then you did -- I mean, obviously, you touched on the Middle East business being more resilient than I think people worry about. At what point do you start to worry about this? I mean I'm just curious in terms of does it disrupt the pace of contract awards? I know you mentioned there's a long duration to the backlog there. But I'm just curious at what point should we worry because it does seem like an overhang?

Yes. Again, I would say we are not worried. The work that we're performing there is Critical Infrastructure work. And now we've actually added additional defense capabilities supporting the war. Hitting on the Critical Infrastructure work for 60% of our work is in Saudi Arabia. The public investment fund just released their priority 6 ecosystems this week.

So whether it's tourism, travel and entertainment, urban development, advanced manufacturing, industrial and logistics, clean energy, Neom, we play in every single 1 of those areas. They also reiterated that they're going to maintain all giga projects. I don't see any cancellations. So there's only been minor rephasing of programs, but they've got to get ready to be on the world stage, which can be 2030 for the Expo, 2034 for the World Cup. And I'll point out in Saudi Arabia. Importantly, 80% of the investment is going to be deployed within Saudi Arabia. We've been there for 7 decades we have a 50-50 joint venture company. So we see that as very stable.

Within the UAE, we're focused still on a lot of development work. There's still a lot of development that has been going on. So we don't see any slowdown there. And Qatar, our focus is primarily on 2 areas. Ashgalis our primary customer. And then we do a lot of work in the city of Blue South or which we just got the contract recompete win. So we've been very strong. As a result of the war, we've been supporting during the war effort, cyber, electronic warfare, counter unmanned air systems, air-based defense. And then we see, as I mentioned earlier, post war that we're going to have opportunities, particularly when you look at areas like Critical Infrastructure protection, a lot of the attacks from Iran have been on data centers, water utilities.

So those assets are all going to have to be protected, potentially put underground, but definitely have critical infrastructure protection. And then there's going to be additional rebuild. So to have a company that has a long deep history within the region, a very demonstrated proven performance as a trusted partner, We look forward to continuing to work across the Middle East and be able to help that region very quickly recover.

Our next question comes from the line of Jonathan Siegmann from Stifel.

Matt and Dave, on the Cyber Hunt contract win, interesting work, and it's new for Parsons. You mentioned it's going to start ramping up in the second half. Can you maybe level set just how steep that ramp could be and any kind of differences in margins or capital intensity of that type of work?

Yes. So I'll start, and Matt can jump in as well. But we're excited about the Joint Cyber Hunt Kit award. It started off as another transaction agreement over 100 companies submitted white papers. They down selected the 3 companies to build prototypes and then we were ultimately selected as the successful winner. We've already started the low rate initial production, and we'll be moving into production in the fall. I will note that we've produced over 500 of these kits. We're expecting another 500 to 750 as we go forward on the new contract. Another unique thing that was in our solution is -- it's the first use of a genic AI in a threat hunt kit solution, and we think that was a big discriminator in helping us win that award. It's margin accretive. It is double-digit margins.

Yes. So John, just to add on to Carey's $500 million ceiling over a relatively short window, kind of 3- to 5-year contract, booked the first $250 million within the quarter. So feel really good about that work. We've already kind of started long lead material purchases on the production orders to kind of get ahead of schedule and help out there. I would say for second half versus first half, we're seeing about a $50 million growth on those -- on that contract, which is helping our second half, of course.

And then I think from a margin perspective, this year, it's favorable and accretive. I think we'll see more benefit in the out years as we get further into the production and deliveries.

Fantastic. And maybe one more for you, Matt. And I think your earlier comments tied to this, but just to confirm directly, remaining performance allegations for Federald Solutions was down sequentially and diverge from funded backlog. Is that just the phasing that you mentioned earlier? Or is there anything else to kind of keep in mind?

Yes. No, exactly. It was the phasing that I mentioned and nothing else behind that.

And our next question comes from the line of Tobey Sommer from Truist Securities.

I wanted to double click on the Middle East, again, if we could. With some of the -- your customers experiencing less oil, petrochemical revenue currently. Is there -- how do you look at the risk that the eventual rebuilding of that to generate revenue could proud out or elongate the projects that you are working on and pressure a little bit of revenue growth there?

Yes. First, Tobey, I'd say that among sort of the 3 major investment funds, Abu Dhabi, Qatar and Saudi public investment fund, they've amassed over $5 trillion of wealth. So when you look at Abu Dhabi Investment Fund, they're like the fourth largest sovereign fund in the world. The public investment fund is the fifth largest sovereign fund in the world. So they have amassed a lot of wealth over time regarding oil prices. They also have the capability both in the UAE and Saudi that they aren't dependent on the Strait of Hormuz. They both have oil pipelines that they can continue to transport oil.

The focus within the regions is very strong. There's a Saudi Vision 2030, there's visions in the UAE for 2030 and 2040. There's a national vision for Qatar for 2030. Their whole focus has been how do they diversify their dependence away from oil. So to be able to do that and achieve that, they're still going to prioritize infrastructure investments and to be on the world stage and be present for those events. What we're seeing, and I'll take public investment fund strategic plan that they just published is the rephasing and moving things away from other sectors or other priorities to stay laser focused on what's going to drive economic and social benefit to the region, and that's where we play.

Appreciate that. And then if I could, with respect to the Cyber Kits and that aspect of your business related to technology and sort of products, how do you envision that growing and becoming a more meaningful part of the company? And if you could dovetail your M&A strategy in coming years, with your response?

Yes. Thanks. So we have a lot of products within the portfolio. Cyber Hunt Kit being one of those. We also have -- I'll just give you a few examples, assured position, navigation and timing. So if you lose your GPS signal, you can get location information. We have a product called TRx, which is an emulator product that could emulate certain signals that's been useful in Ukraine and can also be useful in Endo Paycom and in the Middle East region. In the space side, we have a space series of products that's called the ACs products. that are involved with a lot of the control timing of satellite vehicles we have space ground systems. We've delivered over 170 different ground system solutions.

And then on the infrastructure side, we have the intelligent transportation system where we're the most globally deployed system in the world today, just extending our reach now into the Middle East. We had our first deployment there. And we've won some real big statewide procurements recently, including Georgia. So products is definitely a focus for us. So matter products into 2 categories. We have products that you might call hardware products, and I'll take like our Blue Fly system. It's a search and rescue system that's able to assist local law enforcement as well as customs and border protection. But the secret sauce within there is really the digital signal processing, and that's an area that we focus on as a company.

So our product offerings include both software as well as hardware. And I would say a lot of the companies that we have been acquiring in addition to ceiling tech, which produced the Joint Cyber Hunt Kit do have products, capacity and focus, and you can expect to see that going forward. We think that, that helps with our differentiation as a company. We think that's driven are very strong win rates, which have been consistent over the past 3 years, and they're also margin accretive.

And our next question comes from the line of Mariana Perez Mora from Bank of America.

So the first one is a little bit on the budget. The market is mostly concerned about now like the $1.5 trillion ask, but actually how much could actually be done in an election year. How do you think about growth? And how much is already like funded or procured, if you were to think about like a full year continuing resolution. And how are you positioned to that scenario?

Yes. First, so I would say in an election year, a full year continuing resolution is probably very likely. We know how to live with continuing resolutions. We've lived with them for decades. The key for us is really getting these large -- on the federal side, large task order awards, which we've just announced to that are worth $400 million over the next 3 years. Because once you have those then you don't really fall under the CRO you need to do is deliver task orders to those.

Another important thing, obviously, with our portfolio is 50% of our portfolio does not fall under the federal government. So half our business is kind of immune from that I would say the budget, we are excited about not just this upcoming budget, but to see the $150 billion of prior reconciliation dollars starting to flow, whether that's for Golden Dome, the munitions, Pacific deterrents, the FAA modernization, that all benefits our portfolio. We do have a record backlog as well. And out of that backlog, 71% is funded and $11 billion of awards not booked yet. So I think we're well prepared as company run for a long time and having these large other transaction agreements and IDIQs puts us in a good spot.

At. And then if I can be more specific, there is about like a month ago, the Department of State put out a request for information for the second iteration of dips diplomatic platform support services contract at to you actually benefited from that and you got the confidential contract within that main award. How do you think about that? Because when you look at like the areas they are looking at, core transportation and logistics, security with like physical and electronic security support, infrastructure, maintaining and construction and remediation. And if we think about like the the activity going on in the Middle East right now, I would have expect those volumes to pick up. How are you thinking about that contract right now? How are you thinking about like the regards to our information and your positioning towards that?

Yes. Thanks, Mariana. So the DPS contract, to your point, is coming out for reprocurement again. I believe we were the #1 awarder at the very top on the last steps contract. -- we are definitely planning to bid and prepare to win that contract. Within the Department of state today, the majority of our work is with diplomatic security we provide for diplomatic security, electronic security systems. We do biometrics capabilities and counter unmanned air systems. -- we deploy those at over 250 embassies and conflicts to date throughout the world. And I'd say that's kind of our ongoing continuous business. But the DIPS contract, we are going to be bidding.

Our next question comes from the line of Louie DePalma from William Blair.

On the space front, last year, you announced a strategic partnership with Global Star -- and I was wondering, do you anticipate any potential positive impacts from the proposed Amazon acquisition, perhaps you could become 1 of Amazon's main satellite partners for defense applications across their LEO broadband and also their LEO cellular constellations that are in the process of being built out -- and also related to the Globalstar partnership. Is there a potential that your technology could be embedded into drones and other unmanned platforms to provide resiliency in the various theaters right now, whether it's the Middle East, Ukraine or the Asia Pacific.

Yes. Thanks, Louie. Appreciate the question. On the second part, the answer is yes, it could be embedded into drones to be able to support. We're excited about the acquisition of the Globalstar by Amazon, and we are starting to engage with Amazon. I don't like to get ahead of these discussions, but I'd be happy to discuss that on future upcoming calls.

And there's been a lot of questions and answers on the Middle East. But are you reiterating the prior full year outlook for 8.5% growth in the region? And -- has there been any change in like the long-term view? And in terms of the variables, like how important is like the price of oil in terms of the long-term picture here in the Middle East.

Thanks, Louie. Yes, we are reiterating our 8.5% growth for the Middle East. Long-term view, we're very optimistic about the Middle East. One thing we've done very well is, first, we've been positioned there are some in decades. We have gotten in at kind of ahead of need. We're seen as their trusted partner for all their big programs. We positioned intentionally around Riyadh about 3 years ago because we knew if there ever became funding challenges, they would focus on RiyadhRio because of the Expo and because of the World Cup. So we're involved in transportation. We're involved in urban development. We're involved in water and environment. Then we expanded our capabilities recently into defense and security. So we won a border wall project, and we won a project with the Ministry of Defense.

So we've moved into other sectors. We've also gotten into data centers. We're currently involved in about 12 data center projects within the region and also artificial intelligence projects. So I think what the team has done there very well has successfully moved from our core, which is going to continue into new areas. And I believe that we're focused on the right priorities. If you look at Saudi Arabia, 49% of their GDP is now based on non-oil. So the countries over there have been very successful in diversifying away from oil. I'm really excited about our prospects in the country. I think they're going to only increase after the war with Iran.

Great. And so even if priorities shift you expect to maintain your share because Parson's ability to be versatile in terms of like perhaps shifting from a transportation project or an entertainment project to a data center project? Or what shifts do you expect to potentially take place?

So I would say, again, public investment fund in Saudi just reiterated their 6 priorities. So they're laser-focused on tourism and entertainment, urban development advanced manufacturing, industrial logistics, clean energy and Neon. We're in all 6 of those areas. So whether it's doing airports, the world's art entertainment city. -- participating in the World Cup and the Expo. -- tourism and hospitality sector we're in. We do a lot of urban development with the developers there. I mentioned we're doing the data center work in country. building industrial cities. We're performing logistics efforts. We do a lot of water work, desalination work, renewable work. So I think we're just really well positioned where the money is going to be spent.

And our next question comes from the line of Noah Poponak from Goldman Sachs.

Matt, is it possible to quantify what's in the full year revenue guidance -- what are you assuming for organic revenue growth in Federal Solutions ex confidential and organic revenue growth at CI. And how do you expect those to split first half versus second half? .

Yes. So federal, excluding confidential contract, organic revenue growth is 6.6%, and then CI is just north of 6 6.1%. In first half versus second half, call it, just about 4% on federal versus 9 in the second half and then infrastructure is 3-ish first half and then 9 in the second half. So that's the ramp that we talked about earlier.

Helpful. And Matt, on the CI margin, I guess, a lot of progress there in the last 18 months. The guidance implies that slows down quite a bit through the rest of the year. Can you talk a little bit more about that? Trying to figure out if that's truly mix and other inputs? Or if you're sort of still living in ultra conservative mode because of the issue of that margin?

Yes. So without a doubt, very happy with the performance of the CI margin over the past quarter, 18 months to your point. And so again, 10.5% at the midpoint is about 10 basis points above 2025. We still have these legacy contract closeouts that we're going. So I would say there's some thought in my mind around some flexibility for Kerry and I if we were to accelerate some of the closeouts. But generally speaking, to your point, the performance within the business is quite strong. And so we feel really good Generally, the only other thing I would add is Q1 was a little bit stronger than expected with lower pass-throughs and materials, as I mentioned before. And so there's some natural headwinds over the next 3 quarters as we ramp on some of those newer programs. But all in all, again, just really strong performance out of Middle East and North America and some favorable trends.

Okay. And Carey, you mentioned munitions and missile support, missions work a few times on this call. Remind us what you do there and maybe how big that is? And then you also mentioned reshoring of critical minerals. What does Parsons do there?

Yes. So Matt will give you the numbers on how big others in just a second. But let me hit on what we do on munitions. So we currently have projects at both Holston and Radford and we've been awarded 4 of those projects to it each. And what we're doing is modernizing the facilities. When you go to these facilities, they're old, they're like to decades old. So we will go in, for example, and put a new incinerator system that is more modern, doesn't have as many environmental issues. That would be a sample project. We built a great moat around this because we actually have not had competition on most of these projects. So we're really well positioned there. The most recent win that we have was the Neom award. And that was a unique 1 because that's with a commercial Norwegian company to stand up an energetic facility within the United States.

So when you look forward, both under the reconciliation funds that were already passed and you look forward at the next budget, there's a big focus to redo our plans, recognizing the importance of both ammunition and munitions. And I think we're in a really strong spot for those.

And then your second question on critical minerals. So we provide -- we're a delivery partner to private clients as well as federal agencies across mining projects, industrial projects and infrastructure programs Our history in the mining and critical minerals space dates back to 2013. And it really started with the 2 mine projects I mentioned on the call, Giant and Faro mines. Those are 2 of the most complex high-risk environmental programs in North America, they're up in Northern Canada.

So at Giant mine, for example, we're managing the safe construction of the roaster complex stabilizing underground workings and containing about 237,000 tonnes of underground arsenic trioxide. And at Faro Mine, we leak taminated water treatment, dam safety management, landform reconstruction and Habitat. These are most multibillion-dollar projects. They're each over $2 billion, and they range from $12 billion to $20 billion. So the expertise that we have there is very applicable to some of the critical minerals onshoring activities where they're going to need companies that come in and they understand the technology, they understand speed to production can manage program and construction management, perform contaminated waste management, deal with indigenous communities and understand how to do the environmental work.

Matt, over to you.

Yes. I'd say just high level, each 1 of these contribute kind of $40 million to $50 million a piece. Radford is a little bit smaller this year as it kind of scales back in terms of delivery. But all in all, really strong market that's growing, and we're really excited to be part of it. Obviously, it's a high demand for the administration. And so we're happy to show -- use our capabilities here and and be able to grow this market.

And each of the 5 projects I mentioned are over $100 million in revenue.

Over the period, it's about $40 million to $50 million per year.

And our final question for today comes from the line as a follow-up from Jonathan Siegmann from Stifel.

Just back on some of these products. The IronClad controller that you guys offer, can you just sketch out the opportunity for that product? And is that something that might have been used on some of the drones that were deployed in Epic Fury or maybe partnered with some of the drone dominance programs.

Yes. The name is not bringing a bell with me, John. I'll have to get back to you on that one.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to David Spille for any further remarks.

Thank you all for joining us this morning. If you have any additional questions, please feel free to contact me directly. We look forward to connecting with many of you over the coming weeks. And with that, end of today's call. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

All right. Music is off, it's time to roll. So thanks so much, guys, for joining us for the last session of the day, I believe. So joining us for this session is the Parsons folks. For those guys in the room, my name is Adam Seiden. I'm the U.S. machinery and construction analyst.

From Parsons, we have Carey as well as Matt joining us on stage. And of course, David is out there as well in the audience. So the format of this session is, like the other ones today is a fireside chat, myself and the guys and gal to my left. And then we'll also be opening it up for the audience response questions as we get through the session here.

So with that, team Parsons, thanks so much for being here.

Thanks for having us, Adam.

Great. So I guess I wanted to start off because this is the first time that you and I have been on stage here together here in Miami. So we could talk a little bit and reflect on the past. So you exceeded the high end of your '23 Investor Day targets quite significantly. If you could just talk through of that -- of those targets, like what portion of that outperformance was structural versus cyclical in your views?

Yes. So first, I'd say we were very pleased to exceed the high end of our range for all of our targets. From a revenue growth perspective, we saw very strong tailwinds in terms of budgets. And I would say, particularly, we're in the right markets. If you look at our 6 end markets, they've all had very strong compound annual growth rates, whether it's cyber and electronic warfare, critical infrastructure protection, transportation, urban development, water and environment, or space and missile defense.

On our adjusted EBITDA margin, we're pleased that we were able to get 120 basis points margin expansion across that time period with both segments contributing. And I'd say on the cash flow, we had a compound annual growth rate of 26%. So very pleased with how we've done since our March '23 Investor Day.

Yes, as you should be. So if you think about the -- now the forward plan here, right, for '26, '28, you guys spoke to that a bit the other day around earnings. So one of the inbound feedback that we've gotten is just comparing the organic growth rate on the go-forward versus what you've just delivered.

So just trying to get a sense of level setting for us, like why is the mid-single-digit view the right anchor point just given the performance that you guys have had over the last couple of years?

Yes. And I'll probably lead off and Carey can add in if I miss something. But I would say really happy with the growth over the last several years, as you mentioned, it's a great performance on kind of across the board. When I look at the next couple of years, we're still seeing really strong growth, and I'll kind of break it up into the pieces. If we look at the Middle East, double-digit growth for the past 3 years. We're looking at 8.5% growth this coming year, still very strong, really accretive margins there in the Middle East.

Within North America, it's a little bit more kind of you have -- as we complete some projects, specifically in 2026, we see a little bit slower growth on the mine jobs as we kind of completed some of the capital projects there and then some of the design work kind of just kind of take a 12- to 18-month window on some of that design work. And so we'll win some new design work and that will kind of backfill the second half. But it's a little bit more just the cyclicality of that business, really excited about the trends across critical infrastructure. And so to kind of get back to a double digit there, I think, again, to kind of say on the bull case, I guess, I would say, within infrastructure if we're going to outperform, it would really be around continued ability to hire faster in the Middle East.

We've added almost 1,000 heads last year in the Middle East and continue to see strong demand, whether it's on the recently awarded International Airport in Riyadh, that's 3x the size of JFK for those that fly in and out of JFK. Hard to wrap your head around 150 million passengers a year, but the scale of the projects over there is astronomical. And so I know there's some headlines around some programs that are getting delayed or deferred, but without a doubt, in and around Riyadh is a really strong area for us. And so really great growth in the Middle East and North America.

When we look at the Fed business overall, I think we're looking at about 6.5%, excluding the confidential contract. So still very strong growth that's kind of taking share, of course, if you think about inflation versus labor inflation versus just overall growth. And so we are continuing to take share. We see great opportunities in our missile defense area, specifically Golden Dome. You see some of the impact there flowing through over the next couple of years.

Similarly, if you outperform continued growth within the cyber and electronic warfare area, that's been a key area. You see a lot of what's going on in Russia and Ukraine, and it's amazing how the future wars are changing so quickly. And so just really great demand across the portfolio. And so the outperform would be as you start to see inflow from reconciliation dollars or maybe a $1.5 trillion budget, all those things would help us outperform. But again, really happy with the project the forward-looking growth rates, maybe not quite the double digits we had the last couple of years, but still very strong.

Yes. Totally fair. So we touched a little bit on the top line. Now thinking a little bit on the margin side. You guys came out with a 10%-ish number plus. So what would need to happen for those margins to exceed that 10% level?

Yes. So I'd say really happy with 2025, we had just about 10.4% margin within Critical Infrastructure. We're showing about 10 basis points of expansion in 2026. On the Fed side, we're showing about 20 basis points of margin expansion. We have a slight headwind of $350 million from the confidential contract that wraps up in February of this year. So a $350 million decline year-over-year on an accretive contract. It's a bit of a headwind on the federal side. So Carey and I generally are pretty comfortable with the Fed business being in kind of that high 8s, low 9s, depending on the mix at any point in time. As your cost-plus business grows faster than your fixed price, of course, there's a little bit of pressure on margin.

We've done accretive acquisitions. So we have a great acquisition recently called Altamira, just about $200 million -- just over $200 million worth of revenue this year at accretive margins. So that will benefit the federal business by about 20 basis points. And so you kind of have that shift going on, which is the accretive contract going out, new acquisition coming in. And then we just announced this morning a big production award on a products contract called Joint Cyber Hunt Kit as we continue to get more into the product side of the business, where there's accretive margins within products.

So whether it's our Joint Cyber Hunt kit or Assured navigation precision timing, better known as PNT or some of the other tools that were -- that we see in the field over in the Ukraine today, it's really great demand for our products. And so we see that as an opportunity on Fed as well. So overall, how do we get back to -- how do we get that extra 30 basis points? It's really continued improvement on performance within CI North America, get the legacy contracts completely behind us.

Operationally, they're complete, but getting some of the final change orders and negotiations with customers behind us. And then within Fed, accelerate growth on the product side.

Great. And you did mention, as far as there are some challenges from a fixed price contract. So I think you just defined what it is, but just a reminder for the audience. And then is there any ongoing impact beyond '26 that we should be thinking about there?

So generally, our Federal Solutions sector performs very well. We did have one program, and it was in a remote location. So we experienced some logistical challenge, and we're currently working various options on path forward with our customer.

Got it. So -- your guys' backlog, funded backlog is at really strong levels, record levels, right? So beyond the headline number, though, I think folks like to say like what's actually behind it? What's going on -- when you peel back the onion, what's actually there. So how does the quality and the visibility of the backlog look relative to where you want it to be and to where it was a couple of years ago?

Yes. So I'd say we're very happy at 73% funded backlog. That is the highest that we've ever had. It's very high compared to our peer set as well. One thing when you look at our backlog for our company, we have about $8.7 billion in backlog, but we have another $11 billion in awarded not booked. So if you add the 2 together, it's kind of a better reflection. Within the awarded not booked, about half of that amount is follow-on option year exercises. The other half of that amount is work that's been awarded to Parsons as a single contractor, and we just have to work up to the ceiling value. So I would say, overall, we're pleased with our backlog as well as our awarded not booked.

Got it. So yes, lots of contracts have been awarded. You mentioned PNT. Is that what's going by? Okay. But then -- but in general, also awarded not booked. So when you look at book-to-bill, I guess, just 1x book-to-bill for '26, the feasibility of that, I think you have said in the past, curious there. But then also what gives you confidence as far as forward bookings on the prospects that you see out there?

Yes. So for 2026, we're planning for a 1.0 or better in both federal as well as Critical Infrastructure. Critical Infrastructure has really been a highlight because we've delivered 21 consecutive quarters of greater than 1.0 book-to-bill. And I would also point out that at the Parsons level, we've been greater than 1.0 book-to-bill since our IPO in May of 2019. So even though our revenue has increased over a couple of billion dollars, we've been able to retain that.

Within Federal, we did have the longest shutdown history, 43 days in the fourth quarter. But I'd say we're pleased with the momentum that's coming out of that shutdown. As we announced on the earnings call, we've had 6 contracts greater than $100 million that were awarded. Those were all in the Federal segment. And then we also -- 4 of those contracts were new, new work to Parsons. One of them was $392 million classified contract over a 10-year period. That was a takeaway from a Tier 1 company. We had a $200 million classified contract over a 5-year period. We also were awarded a new rocket facility, Nammo is a Norwegian company. So they're expanding in Perry, Florida, and we're going to be designer and program manager for that facility. We were also awarded $125 million 5-year recompete with the Army Research Laboratory, a contract that we've held for a long time.

And then after the quarter ended, the FAA exercised our option period, which is for 3 years on our technical support service contract, a full year early. So we were very pleased with that. I think it's a testament to our outstanding performance that we've experienced with the FAA. And then finally, the contract that Matt mentioned earlier, the Joint Cyber Hunt Kit, that's a really neat one because it was procured under another transaction agreement. And when it initially started off, there were 100 competitors. It was down selected to 3, and then we ultimately became the winner. We've delivered over 500 of those cyber threat hunt kits prior, and we expect to do over 700 more in this current contract over 3 years.

That's a lot of contracts there. So on the FAA side, the extension and the option that you got there. So how quickly should revenue ramp on that?

Yes. So that option period is 3 years, and it starts April 2027 and runs until April 2030. So that was exercised early. We've been performing on the technical support service contract for 24 years. We've been supporting the FAA for over 50 years. We've worked at over 1,000 FAA locations coast to coast, whether it's navigation aid sites, communication sites, doing automation type of work, radar sites. So very pleased with the support that we've provided. We are expecting in 2026 that our FAA technical support service contract will increase by about 25%.

Got it. So I think earlier, it was mentioned about Golden Dome. So maybe a status update there on the latest involvement there to be a system integrator. And if this does progress, seemingly, this would be activity that could last long past this current administration and so forth, right?

Yes. So on Golden Dome, we see participation in several areas. So I'd say, first, we are the Missile Defense Agency system engineering and integration contractor. We've done work for the Missile Defense Agency for a decades. So are very fortunate to be in that position. When you look at what's going to happen with Golden Dome, initially, there's going to be flight test integrated or FTI, which is going to be a flight test targeted in the summer of 2028.

To get to that flight test, there will be an integration of a lot of existing sensors and weapon systems. So we hope to be able to perform a lot of that integration work. I'd say additionally, we're looking at opportunities on the local area domes, which would be the domes that would protect cities. There, we would leverage our air-based air defense experience, which is work that we're doing for the U.S. Air Force Base in Europe. Our architecture and our design concepts, we feel have a lot of applicability to the local area domes. We're also on one of the space-based interceptor teams. There were 4 small awards that were granted in that area. And then we're involved in non-kinetic effects. How do you take out a missile using cyber and electronic warfare techniques rather than kinetic warhead. I believe Golden Dome is going to go on, but currently within the $25 billion, the objective immediately is to get to that flight test integrated.

Great. So lots of projects, lots of prospects, things like that. When you think of your medium-term growth aspirations and so forth, how much of that is predicated on budget expansion versus your own share expansion within the categories that you play in and maybe other variables thereabouts?

Yes. I'd say the most important thing for growth that we're looking at in the immediate term on the federal side of the house is our alignment to the reconciliation bill. So Department of War got $150 billion. Department of Homeland Security got $190 billion. So we're aligned to the $25 billion we just discussed on Golden Dome. We're also aligned to the $25 billion that is there for Army munitions and ammunition plant modernization. In addition to the Nammo plant I mentioned earlier, we have 2 projects at Houston and 2 at Radford, which are 2 of the more important Army ammunition plants.

Additionally, we expect to tap into the $12.5 billion of the FAA aviation modernization funding and some of the $12 billion out in INDOPACOM. We have hundreds of people in the INDOPACOM region. They're working on cyber signals and intelligence as well as doing important infrastructure work. And then I would say on the infrastructure side, we're looking at the Infrastructure Investment and Jobs Act, $1.2 trillion, not peaking until about the 2028 time frame, having about a 6- to 8-year tail after that. We participate mostly in the surface transportation area. That's about $634 billion of that budget.

You would additionally see the next 5-year surface transportation bill getting passed. The objective is to have that passed by November of this year. And within there, we're expecting to see about another $600 billion to $700 billion of surface transportation funding. And then within the Middle East, we're talking very big numbers, $1.8 trillion through 2030, where we've been experiencing rapid growth. So when you look at all the funding that's coming in, coupled with our compound annual growth rate of our addressable markets being between 4% to 11% on each of our 6 end markets, we feel well positioned.

That's great. Well, the numbers are big. The airports are clearly very big, too, in the Middle East. So I guess maybe that's a question on the Middle East then. So what's your competitive advantage there that has you guys so successful ultimately? Middle East is close to 20% of revenue, right? And then I guess, how do you guys manage some of the concentration risk or to the point, I think, earlier that like headlines around maybe some shifting priorities of what they're looking to build there, including, I think, just recently, the Asian games got shifted away from the region, too.

Yes. We've been in the Middle East for 6 decades, one of the longest companies there. Within Saudi Arabia, we've had a 50-50 joint venture company called Saudi Arabia Parsons Limited, and that's been in place for 5 decades. The important thing in the Middle East, we've never come and gone as markets have been good or bad. We've stayed there continuously. We're also self-sustain there, so the business can run. We've got finance people, HR people, all the support functions so that they can run on their own. We've successfully delivered the most complex projects in the world over in the Middle East.

So whether you're looking at the $250 billion Cadia, the world's largest entertainment center, King Salmon Park, the world's largest park, 5x size of Central Park. We're doing the airport, as Matt mentioned, King Salmon International Airport. We were just awarded New Murabba, which is going to be an industrial city within Riyadh. We're performing on Riyadh traffic management. We just deployed our intelligent network, which is our first deployment of our advanced traffic management system. We're doing Riyadh Rings and Roads. We're involved in King Abdullah Financial District, and I could go on [indiscernible], which we've done for 5 decades. So pretty much hitting all the major projects there.

How they're balancing the rephasing, I think that Saudi Arabia is being very fiscally responsible. When they set out Vision 2030, it was basically how do they diversify away from oil, and they set up 13 different sectors. So they're putting priority on the sectors to get to the 2030 Expo and the 2030 for World Cup. And those sectors are things like transportation, tourism and hospitality, the things that they need in place to meet those events. Then there will eventually be a Saudi Vision 2040 plan where they can start to refund some of the other sectors. So beyond transportation and urban development, we've also gotten into the defense sector. We've gotten into the security sector doing border security work, and we've gotten into the tourism and hospitality segment.

Yes. So there's -- so that puts the long term in perspective in which there's a lot of activity there. And like you said, 5 decades of experience, you've got a lot of lineage history. Now on the shorter-term side, I think there was -- at the earnings call, you were talking a little bit about the holiday, just holiday timing impacting this year. So ultimately, I guess the question is where does the Middle East look like it's going to grow in 2026? Or what sort of growth rates?

Yes. So as you mentioned, overall, expect the Middle East to grow about 8.5% this coming year. We have seen Qatar and UAE grow faster over the last couple of years in Saudi specifically. We do have the headwind on Nammo that I mentioned before. But overall, again, really strong growth in the Middle East at 8.5%. We do have a little bit of an anomaly here coming up in Q1 where all of Ramadan and Eid slides into Q1 versus being spread over the 2 quarters. So we are expecting flattish for Q1, followed by 18% growth in Q2 to balance out to 8.5%, which is in concert with the total year. So again, really happy with the growth in the Middle East, continued expansion there.

And thinking of other areas across the portfolio, a lot of times I get questions around nuclear and where is there areas -- who's involved in that space? I think you guys mentioned it on the call there. So how big is it today? But more so, like what are the most compelling opportunities in whether it's microgrids or NNSA work and things like that?

Yes. Most of the work we're doing today, we have worked with the Department of Energy. We've been involved with the National Nuclear Security Administration, supporting the 8 sites as the program manager and engineering -- owners engineer rep for a number of decades. It's been a successful contract for us. We also won a year ago the counter nuclear smuggling detection and deterrence system, and that's a $1 billion contract. We're 1 of 2 contractor awardees on that. That spans over about a 5- to 6-year period. And so that's off and running. We were awarded the Africa region. We were also awarded the Eastern Europe region and most recently, the INDOPACOM region under that contract.

We're doing microgrid work. We have a contract with the Army Corps that we're working on currently in Puerto Rico that's been quite successful. And we're looking at some various small modular reactor projects that would be with the Department of Energy. A lot of our role is going to be program management and owners engineering rep.

Great. Maybe we'll switch over to the audience response questions for a minute here. There's little gadgets on your table there to participate.

First question will come up in a half a second. All right. So do you currently own the stock? Yes, overweight, market weight, underweight or no? Carry, no clicker. Okay. Room full prospects.

Next question, please. What is your general bias towards the stock right now, positive, negative or neutral? Once the timer goes, it's the best time to click. All right. It's about half and half split between positive and neutral.

Next question, please. In your opinion, through-cycle EPS growth for Parsons will be above in line or below peers?

I think Dave has 2 remotes back there.

He's got like a treat. All right. About 60% of the room says about in line and about 40% above.

Next question, please. In your opinion, what should Parsons do with excess cash, bolt-on M&A, larger M&A, repos, divvies, pay down -- debt paydown or internal investment? Okay. So we got a little bit of M&A and then about 2/3 of the room on the repo side.

Maybe let's talk just about M&A for a second. You just recently did the Altamira deal. I think that came up earlier in the conversation here. So how does that strengthen your guys' competitive position in those markets?

Yes. We're really excited about Atomira. That brings 600 employees, 90% of whom hold top clearances into the organization. Their focus is on areas, including signals intelligence, specifically [ Multi-intelligence ]. So how do you merge various types of intelligence like HUMINT, GEOINT, SIGINT altogether into an actionable intelligence solution.

Second, they're focused on missile warning and missile tracking. That's another area that is going to be very important for Golden Dome. So it gives us more tools in the tool chest as we look forward to that. And third, they're focused on space ground systems and specifically with the intelligence community. We have a great opportunity to cross-sell with Altamira. They have a better presence and bigger in terms of the intelligence community. A great example is there at the National Air and Space Intelligence Center. We're at the Missile Space Intelligence Center in Huntsville, so we can both cross-sell our capabilities to each other. And recently, they were awarded a very large contract with the National Security Agency, which expands our presence there. Likewise, we have a very good presence with Department of War that we can bring in their capabilities.

Got it. And one of the reasons why I think repo came up on here is because there's been a bit of share activity there, partly on the case of AI. So just curious, we're asking every company at this conference these questions around AI, but also just it's relevant, of course, for your services. So ultimately, how do you guys think AI affects your business and your customers' businesses -- customers' project aspirations?

Yes. So I'd say we've been doing AI for over 2 decades. It's embedded pretty much into everything we do on external use cases and on internal cases across the company. Within our federal business, we're a mission solutions provider. So whether we're providing offensive cybersecurity solutions, doing space situational awareness, counter unmanned air systems, it's ingrained into our offerings.

And then if you look on the infrastructure side, I always like to equate it to when I graduated from college, I was drafting. After I got out of college, there was computer-aided design, then we went into building information modeling, and we went from 2D up to 5D. AI is just another logical step in that sequence. So if we can get to a point that we can leverage AI to basically take architecture work and AI basically enable it, digitally enable it, that makes it better for the designer because now you're allowing the designer to move to a more critical level of thinking and being able to use more automation and predictable tool sets. And that's what we really want to do as a company is kind of move up that value chain.

So I would say for us, it's not a new fad. It's not a branding technique. We are an AI company. We've been applying artificial intelligence across both segments. We've identified very strict use cases, revenue cases, been able to drive those with our customers, and it's driven operational transformation throughout the company.

Excellent. Maybe to the last question here as well. Guys thought we were done. We got one more. All right. In your opinion on what multiple of '26 earnings should Parsons trade. It ranges from less than 10x to higher than 21x. We'll let that go here. Perfect.

All right. Split of the room at around 16 to 18 and 19 to 21. All right. So a question, I know we've talked about this before a little bit, but given the split of the portfolio on CI and on the federal side, how do you see that diversification enhancing or not the valuation of the company and giving -- and how it forms the investment narrative?

Yes, I would say it's definitely an enhancement. And we've, as a company, been able to capitalize on the synergies between those 2. What's important to note, if you look over the last 3 years in both segments, if you exclude the confidential contract cancellation, we've been the industry-leading growth leader, one of the top growth leaders in both segments. So we've really been very successful.

And if you look at the intersection between those 2, whether it's aviation modernization, where we work with the FAA on the federal side of the house, but we've done over 450 airport programs on the Critical Infrastructure side of the house. In fact, won 5 new airports within the last 12 months. If you look at an area like PFOS, PFAS, that's $40 billion addressable market for Parsons. We have a subject matter expert team that sells both to the FAA and the Department of War on the federal side of the house, but industrial customers and water customers on the critical infrastructure side of the house.

And a final example I'd share, Adam, would be critical infrastructure protection. Department of Homeland Security has identified 16 vertical critical infrastructure protection sectors. So how do we protect areas like transportation, utility, water, facilities, health care, telecommunications from being attacked from cyber attacks. We're the only company that's vertically integrated. So we understand the domain knowledge from our critical infrastructure side of the house, and we have the cyber protection capabilities from our federal side of the house.

Excellent. So that dovetails into this question. It has a lot of similarities and maybe a good wrap-up one here would be, as a company, you guys have emphasized moving up the value chain and so forth. What does the ideal Parsons portfolio look like when you get through the medium-term aspirations and targets that you laid out there?

Yes. So I would say we're happy with our portfolio, very happy with the way it is today. We like the 50-50 split. We like our 6 end markets. We've got long-term tailwinds in all 6 of the end markets. We're looking at compound annual growth rates across each of them that range between 4% to 11%. We've been able to capitalize on the markets by having outstanding win rates over the last 3 years, we've exceeded 60%. So I would say what we need to do is stay in the markets where we can be a top player. These are enduring markets. They're profitable markets. And I think we've shown that we can be technologically differentiated.

Excellent. Well, Carey, Matt, Dave, the Parsons team, thank you so much for being here. Let's give them a round of applause.

Thanks.

Good day, and thank you for standing by. Welcome to the Parsons Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host for today, Dave Spille, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2025 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair President and CEO; and Matt Ofilos,CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our fourth quarter and fiscal year 2025 financial results as well as a review of our 2026 guidance and long-term growth rates. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2025, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements.

Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures.

And now I'll turn the call over to Carey.

Thank you, Dave. Good morning. Welcome to Parsons' Fiscal Year 2025 Fourth Quarter Earnings Call. 2025 was a successful year despite [indiscernible] federal government macro environment. We delivered 12% total revenue growth and 8% organic revenue growth, excluding our confidential contract. We continue to be [indiscernible] the organic revenue growth leaders in both of our segments with 10% organic growth in critical infrastructure and 7% organic growth in Federal Solutions excluding the confidential contracts.

We expanded our adjusted EBITDA by 60 basis points to a company record of 9.6%. This record margin builds on the 50 basis points of expansion we achieved in 2024. Additionally, we delivered free cash flow conversion of 100% and exceeded the high end of our fiscal year 2025 cash flow guidance range. We efficiently deployed capital by completing 3 acquisitions during the year and increased our share repurchases while maintaining a strong balance sheet with ample capacity for further investments in our growth strategy.

From an operations perspective, we won strategic contracts, achieved high win rates of 61%, maintained strong hiring and had record retention rates, delivered double-digit total revenue growth in both critical infrastructure North America and Middle East business units. Also, we were named the #1 program management firm in the world by engineering news record, one of the world's most trusted companies by Forbes, one of the best led companies by Glassdoor and one of the world's most [indiscernible] companies by [indiscernible].

We are proud of our 2025 accomplishments, and I want to thank our more than 21,000 employees for their contributions to delivering our customers' most critical missions. The end of 2025 marked the completion of our performance against the 3-year Investor Day targets established in March 2023 with a focus on creating long-term shareholder value. I'm pleased to report that we delivered on the strategy that we outlined at this event of investing in integrated solutions to move up the value chain and win larger and more strategic programs.

During this 3-year period, we exceeded the high end of all of our Investor Day targets. Total revenue, adjusted EBITDA and operating cash flow. From 2023 through 2025, we increased total revenue by 52% or more than $2 billion. This equates to a 3-year compound annual organic revenue growth rate of 10%. And excluding the confidential contract, our 3-year compound annual growth rate was 9%, nearly double our 4% to 6% Investor Day target.

Over the same period, we increased adjusted EBITDA by 73% and expanded margins by 120 basis points resulting in an adjusted EBITDA compound annual growth rate of 20% over the 3-year period. Additionally, we grew cash flow from operations by over 100% since 2022, equating to a 26% compound annual growth rate. Given our strong operating performance over the last 3 years, we were able to reduce our net debt leverage ratio from 1.4x to 1.3x while deploying over $1.1 billion on 8 strategic acquisitions, capital expenditures and share repurchases.

As we look forward over the next 3 years, we expect to again drive long-term shareholder value by achieving mid-single digit or better and organic revenue growth, supplemented with accretive acquisitions. Additionally, we believe we can continue to expand adjusted EBITDA margins over the next 3 years with the goal of double-digit margins by 2028. This expansion is on top of the 120 basis points of margin improvement achieved over the last 3 years and on a revenue base that is more than 50% larger than when we initiated our plan in 2023. Finally, we expect a free cash flow conversion rate of 100% or better over the next 3 years.

Moving to our fourth quarter results. We delivered strong revenue growth, adjusted EBITDA margins and cash flow. Although our fourth quarter revenue was below our expectations, we achieved total revenue growth of 11% year-over-year and 8% on an organic basis, excluding our confidential contract while continuing with the impacts from the longest government shutdown in history. These growth rates include 9% and 6% on organic growth in our Critical Infrastructure and Federal Solutions segments, respectively.

In Q4, our adjusted EBITDA margin expanded 110 basis points and operating cash flow of $168 million grew 32% year-over-year. We also closed the acquisition of Applied Sciences during the fourth quarter. In addition to delivering solid financial results for the fourth quarter, Critical Infrastructure now has 21 consecutive quarters with a book-to-bill of 1.0 or greater, and we won 4 contracts over $100 million in Q4 with 3 of the 4 contracts representing new work for Parsons. All 4 contracts were within our Federal Solutions segment, and we had 15 wins over $100 million for the year, matching last year's record.

Significant fourth quarter contract wins include a new 10-year $392 million single work contract by a federal customer. On this contract, we will deliver advanced biometrics and identity management solutions, combining hard work, software and integration expertise to support federal, defense and law enforcement missions. Parsons has deployed over 3,500 mobile biometric solutions that collect and analyze data in real time, enabling faster identity verification and improved threat detection. We booked $36 million on this contract during the fourth quarter.

We were awarded a new 5-year single-award classified contract with a value of $200 million. We booked $23 million on this contract during the fourth quarter. We were awarded a 5-year $125 million single-award repeat contract to support the United States Army Combat Capabilities Development Command, Army Research Laboratory, high-performance computing modernization program and defense research and engineering network. Parsons will deliver an array of services, including research, development, test and evaluation, infrastructure operations and comprehensive project management. We booked $44 million on this contract during the fourth quarter.

Finally, we were awarded a contract valued at over $100 million by [ NAMA ] to provide design and program and construction management for a new rocket motor manufacturing facility in [indiscernible], Florida. The 2-year industrial-based modernization contract represents new work for the company. This project directly supports the Department of Wars acquisition transformation strategy by expanding the United States munitions production capacity, strengthening supply chain resilience and accelerating delivery of critical capabilities to the warfighter. We booked the full value of the contract during the fourth quarter.

After the fourth quarter ended, Parsons was awarded in early $593 million contract extension under the Federal Aviation Administration's Technical Support service contract to provide program and construction management engineering, technical services, health and environmental safety, fire protection, equipment installation and testing and logistics. The FAA elected to exercise our 3-year option period nearly a year early, underscoring Parsons' person's critical role in FAA's nationwide aerospace modernization.

And finally, after the fourth quarter ended, we received an intent to award notification for a sole-source contract from a national security customer. The contracts new work for the company with a ceiling value of up to $500 million. We booked $13 million on this contract for the low rate initial production, which was awarded during the fourth quarter.

In addition to winning these large contracts, we effectively used our balance sheet to acquire strategic companies with critical intellectual property that strengthen our existing portfolio by generating revenue growth and adjusted EBITDA margins of 10% or more. Parsons is viewed as an acquirer of choice in the industry, which frequently provides us the opportunity to pursue preemptive M&A.

During the fourth quarter, we acquired Applied Sciences Consulting, a Florida-based engineering firm that specializes in modern storm water solutions for cities, counties and water management districts across states. Water is our most profitable and fastest-growing market within the North America Infrastructure business unit. This acquisition expands our expertise, strengthens our presence in Florida and exceeds our financial M&A thresholds.

After the fourth quarter ended, we closed on our acquisition of Altamira Technologies Corporation in an all-cash transaction valued at up to $375 million, including the $45 million earn-out. Altamira advances high-priority national security mission supporting intelligence community and Department of War customers by providing multi-intelligence, technology solutions and performing critical operations. Altamira spans person's market presence and signals intelligence, [indiscernible] and foreign military exploitation and adds critical customer depth with the National Airspace Intelligence Center, National Security Agency and other classified intelligence customers.

There are more than 600 employees, 90% of whom hold security clearances, share the same mission focus as Parsons. And we're already working on revenue synergies, including cross-selling to our customers, expanding our Golden Dome offerings and providing full kill chain solutions from space to operations.

Altamira's technologies, including AI ML, signals and data analysis, cyber operations and their deep software engineering capabilities will accelerate Parson's expansion into the rapidly growing intelligence in multi-domain areas. The transaction is consistent with Parson's strategy of completing accretive acquisitions with revenue growth and adjusted EBITDA margins of at least 10%.

As we enter 2026, I could not be more excited about our robust and diverse opportunities to continue to grow our company and outpace industry growth rates. Our unique and synergistic critical infrastructure and Federal Solutions portfolio, which consists of 6 growing, profitable and enduring end markets, provide substantial tailwinds for us to meet or exceed our financial objectives.

In Critical Infrastructure, we see strong demand in both North America and Middle East markets. In North America, our focus on hard infrastructure such as roads and highways, bridges, airports and rail and transit is aligned to the administration spending priorities. The infrastructure investment in Jobs Act provided states the confidence they needed to move forward with major infrastructure projects and discussions on the next surface transportation bill are well underway. This new 5-year bill will add more funding for U.S. infrastructure spending.

In the Middle East, our business remains well positioned for decades to come. In the fourth quarter, we had key wins, including new [indiscernible] Traffic Management and [indiscernible] Properties. In addition to our legacy transportation and urban development areas, we successfully leveraged our Federal Solutions capabilities to move into the defense and security markets and drove synergies critical infrastructure with the first deployment of our Intelligent Network or iNet, advanced traffic management system into the Middle East. This market expansion illustrates the value of our synergistic and diversified portfolio, which creates global opportunities.

With long-term structure tailwinds in 21 consecutive quarters of book-to-bill of [indiscernible] or greater, we've delivered double-digit total revenue growth in both North America and the Middle East for 4 consecutive years, and we expect further growth in both geographies for the foreseeable future. We are winning the largest projects in our company's history, and we've established a distinguished global reputation.

In Federal Solutions, we remain excited about the upward momentum in defense budgets. This includes a reconciliation funding of over $150 billion for the Department of War and over $190 billion for the Department of Homeland Security, the vast majority of which has not been spent and the potential of a much larger defense budget in 2027. Our purpose-built portfolio has strong alignment to the administration's priorities, especially in full-spectrum cyber operations, electronic warfare, air and missile defense, space superiority, counter unmanned air systems, industrial-based modernization and border security. Through our acquisitions and internal research and development investment, we've developed differentiated capabilities to protect our nation and deter adversaries.

In summary, we've been one of the industry growth leaders in both of our segments for the last 3 years, and we expect this success to continue as we leverage our unique complementary and diverse portfolio. Our balanced portfolio and alignment to priority areas enabled us to withstand short-term headwinds that occurred last year. We've demonstrated our ability to cross-sell capabilities, including cybersecurity, critical infrastructure protection, advanced manufacturing, program and structure management, aviation, environmental remediation and intelligent transportation systems.

Our business remains steadfast as we are consistently delivering mid-single-digit or better organic revenue growth while expanding margins and delivering strong free cash flow. Also, we're supplementing our organic growth with accretive acquisitions to further differentiate our portfolio. In addition, our balanced portfolio diversifies our revenue stream is our largest contract is expected to only generate 4% of our total revenue in 2026. Our leading indicators, which include $55 billion pipeline, strong win rates of 61% in 2025, total backlog of $8.7 billion, of which 73% is funded and our $11 billion of contract wins that we have not yet booked, gives us confidence that we will continue to outpace market growth rates.

As a result, I look forward to what we'll accomplish in 2026 and over the next 3 years. We have an experienced management team operating in 6 end markets that are all growing, a purpose-built national security portfolio that outpaced [indiscernible] threats, unprecedented global infrastructure spending and a favorable financial outlook with an effective capital deployment strategy.

With that, I'll turn the call over to Matt to provide more details on our fourth quarter and fiscal year 2025 financial results. Matt?

Thank you, Carey. 2025 financials were highlighted by strong revenue growth, significant adjusted EBITDA margin expansion and delivering free cash flow ahead of expectations. In addition, we continue to effectively deploy capital for strategic acquisitions, internal research and development and share repurchases to support long-term growth and drive shareholder value.

Turning to the details of our fourth quarter results. Total revenue grew 11% and 8% on an organic basis, excluding our confidential contract. These increases were driven by double-digit growth in our transportation, critical infrastructure protection, urban development and space and missile defense markets. Total revenue, including the confidential contract decreased 8% from the prior year period and was down 10% on an organic basis.

SG&A expenses for the fourth quarter decreased 2% from the prior year period. This decrease was primarily driven by effective cost management and lower transaction-related expenses, partially offset by the inclusion of recent acquisitions. Fourth quarter adjusted EBITDA of $153 million increased 5% from the prior year period, and adjusted EBITDA margin expanded 110 basis points to 9.6%. These increases were driven by improved execution and growth on accretive contracts, offsetting lower revenue volume on the confidential contract.

Total revenue for fiscal year 2025 increased 12% from the prior year period and was up 8% on an organic basis, excluding the confidential contract. The strong organic growth throughout the year was driven by the ramp-up of recent contract wins and growth on existing contracts. Total revenue, including the confidential contract decreased 6% from the prior year period and was down 9% on an organic basis.

SG&A expenses for total year 2025 increased 6% from the prior year period. This increase was primarily driven by the inclusion of 3 acquisitions completed in 2025 and strategic investments to support future growth.

Record fiscal year 2025 adjusted EBITDA of $609 million increased 1% from 2024 and adjusted EBITDA margin increased 60 basis points to a record 9.6%. The adjusted EBITDA increases were primarily driven by improved program performance, effective cost control and accretive acquisitions. It's important to note that despite $1 billion of revenue headwinds in 2025 from the accretive confidential contract, we were able to report record adjusted EBITDA and adjusted EBITDA margins, reflecting the strength and breadth of the portfolio.

I'll turn now to our operating segments, starting first with Critical Infrastructure, where fourth quarter revenue increased by $89 million or 12% from the fourth quarter of 2024. This increase was driven by organic growth of 9% and inorganic revenue contributions from our BCC, TRS and Applied Sciences acquisitions. Organic growth was driven primarily by the transportation and urban development markets.

Critical Infrastructure adjusted EBITDA of $87 million increased 87% from the fourth quarter of 2024, and adjusted EBITDA margin increased 420 basis points to 10.6%. Both adjusted EBITDA dollars and margins were fourth quarter records for CI. These increases were driven by improved program performance, the ramp-up of recent awards and accretive acquisitions. For the full year, Critical Infrastructure revenue increased 15% and 10% on an organic basis. The strong year-over-year organic growth was driven by the ramp-up of recent contract awards and existing contracts, primarily within the transportation and urban development markets. This is the fourth consecutive year in which both our North America and EMEA business units delivered double-digit total revenue growth.

Critical Infrastructure adjusted EBITDA of $328 million for the full year increased 73% from 2024 and adjusted EBITDA margin increased 350 basis points to 10.4%. Both adjusted EBITDA dollars and margins were fiscal year records. These increases were driven by strategic portfolio decisions over the past several years, leading to higher margin work and improved program performance. Additionally, we have efficiently managed indirect expenses during a period of strong top line growth.

Moving to our Federal Solutions segment. Our fourth quarter revenue increased 9% and 6% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection, space and missile defense and transportation markets. Total Federal Solutions revenue, including the confidential contract decreased 22% from the prior year period and 24% on an organic basis.

Federal Solutions adjusted EBITDA decreased 34% from the fourth quarter of 2024 and adjusted EBITDA margin was 8.4%. The adjusted EBITDA was primarily impacted by lower volume on the fixed-price confidential contract and recent execution challenges on a program in a remote region. For the full year, Federal Solutions revenue increased 9% and 7% on an organic basis, excluding the confidential contract. The strong year-over-year organic growth was driven by Critical Infrastructure protection, cyber and electronic warfare, space and missile defense and transportation markets. Total Federal Solutions revenue, including the confidential contract decreased 20% from the prior year period and was down 21% on an organic basis.

Federal Solutions adjusted EBITDA for the full year decreased 32% from 2024 and adjusted EBITDA margin decreased 170 basis points to 8.7%. These decreases were driven primarily by lower volume on the fixed-price confidential contract and investments in growth.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q4 2025 was 67 days, a 12-day increase from the prior year period. This increase was primarily driven by lower volume on the confidential contract and strong growth in the associated timing of collections in the Middle East.

During the fourth quarter of 2025, we generated $168 million of operating cash flow, which was ahead of expectations on strong collections and grew free cash flow conversion to 100% for fiscal year 2025. Capital expenditures totaled $32 million in the fourth quarter of 2025 and $68 million for the full year. Our full year CapEx spend was in line with our plan of approximately 1% of annual revenue. Our balance sheet remains strong as we ended the fourth quarter with a net debt leverage ratio of 1.3x. During the year, we closed 3 strategic acquisitions totaling $145 million, net of cash acquired including the cash acquisition of Altamira in Q1 2026, pro forma leverage would be approximately 1.8x based on Q4 results.

During Q4, we repurchased approximately 856,000 shares for $60 million. For the full year, we repurchased approximately 1.8 million shares at an average purchase price of $68.59 for an aggregate purchase price of $125 million.

Turning next to bookings. For the fourth quarter, we reported contract awards of $1.5 billion, representing a book-to-bill ratio of 0.9x on an enterprise basis. On a trailing 12-month basis, our book-to-bill ratio was 1.0x, which continues our streak with a trailing 12-month book-to-bill ratio of 1.0 or greater in every quarter since our IPO.

In Critical Infrastructure, we achieved a book-to-bill ratio of 1.1x, which is the 21st consecutive quarter with a book-to-bill ratio of 1.0 or greater. For the full year, our Critical Infrastructure segment achieved a 1.2x book-to-bill ratio. In Federal Solutions, we reported a book-to-bill ratio of 0.8x for both the fourth quarter and full year. Our backlog at the end of the fourth quarter totaled $8.7 billion, a 2% decline over Q4 2024, mainly driven by the impact from the confidential contract coming to completion.

Our funded backlog of $6.4 billion remains the highest since our IPO and increased 8% year-over-year. At the end of Q4, our funded backlog represented 73% of total backlog, which is also a company record.

Now let's turn to our guidance. For 2026, we expect revenue to be between $6.5 billion and $6.8 billion. This represents 4.5% growth at the midpoint of the range and 0.5% growth on an organic basis. As previously discussed, we had a headwind of approximately $345 million from our confidential contract as we enter 2026 with the program scheduled to complete in Q1. Of the $345 million year-over-year headwind, $275 million will be realized in the first half of 2026. Excluding this contract, the rest of the portfolio is projected to grow total revenue 10.5% and 6% on an organic basis, which is in line with the mid-single digit or better organic revenue growth we've been communicating.

Adjusted EBITDA is expected to be between $615 million and $675 million with a margin of 9.7% at the midpoint of our revenue and adjusted EBITDA guidance ranges. This represents adjusted EBITDA growth of 6% and margin expansion of approximately 10 basis points from 2025 at the midpoint. Cash flow from operating activities is expected to be between $470 million and $530 million. This represents 4.5% growth at the midpoint of the range and 100% free cash flow conversion of adjusted net income. This includes an increase in CapEx spending to approximately 1.5% of total revenue which is mainly driven by growing demand for additional classified facilities.

Our 2026 guidance ranges contemplate domestic budget uncertainty, a competitive labor market, and best estimates related to the government procurement environment. These macro risks are offset by tailwinds to include unprecedented global infrastructure spend, a federal portfolio that is closely aligned to the administration's priorities, recompete risk of approximately 5% of 2026 total revenue, $8.7 billion of total backlog including record funded backlog and $11 billion of contracts awarded to Parsons but not yet booked into backlog. Other key assumptions in connection with our 2026 guidance and our quarterly cadence are outlined on Slide 16 in today's PowerPoint presentation located on our Investor Relations website.

In terms of our long-term financial targets, our outlook continues to support mid-single-digit or better organic revenue growth with a goal of double-digit margin by 2028 and a free cash flow conversion rate of at least 100% of adjusted net income. We expect to supplement our organic growth with acquisitions accretive to both top and bottom line.

In summary, our core business executed very well in 2025, delivered strong revenue growth, excluding the confidential contract, significantly expanded margins and delivered strong free cash flow. That cash flow was redeployed to fund strategic acquisitions, internal research and development and share repurchases to position us for future growth and drive long-term shareholder value.

With that, I'll turn the call back over to Carey.

Thank you, Matt. Although 2025 was a dynamic year in many ways, it validates the strength and resiliency of our portfolio. We're fortunate to operate in 2 large and well-funded segments across 6 growth end markets and we're capitalizing on these tailwinds to remain an industry growth leader, expand margins and generate strong free cash flow. We're optimistic about our future, given our team's proven execution, the tailwinds we have in both segments, our strong total and funded backlog and a robust pipeline of large opportunities.

With that, we'll now open the line for questions.

[Operator Instructions] Our first question coming from the line of Sangita Jain with KeyBanc Capital Markets.

Obviously, CI margins continue to exceed expectations. Just wanted to say if it's safe to presume that the legacy adjustments are behind you? And should we expect this performance as a reasonable run rate going forward? Kind of trying to see if this will be the segment that drives the push to double-digit margins by the end of the planning period.

Sangita, thanks for your question. Yes, the legacy programs are behind us. We're in final closeout stages with the customers, but the execution has completed. We still expect continued expansion in margin for critical infrastructure as we look to 2026. And we also expect expansion in the federal market as we look to 2026, 10 basis points for Parsons and that's 10 basis points for federal, 20 for Critical Infrastructure. Critical Infrastructure will expand more quickly because about 75% of that business is fixed price, time and material and 25% is cost reimbursable. And most of the expansion will come from the North America.

Got it. And one on Federal Solutions, if I can, obviously, 4Q had the impact of the shutdown. So just curious on how you're seeing the cadence of order activity since the end of the shutdown and if it still continues to be more of a book and burn environment? Just trying to see because book-to-bill in that segment has been [indiscernible] for some time now.

Thanks, Sangita. Q4 did have the impact of a 43-day government shutdown, but I'm really pleased on the 6 awards that we announced on our call, all of which were greater than $100 million, were all in the federal segment and a lot of that represented brand-new work for a Parsons. As we go into 2026, we're very confident that we will achieve over a 1.0 book-to-bill for Federal Solutions starting off in the first half of 2026 based upon the award activity we're seeing.

Our next question coming from the line of Louie DiPalma with William Blair.

Carey, you recently announced a win for your drone armor system. How do you view the addressable market in both the U.S. and internationally as there's been a major focus on air defense with drones?

Yes. Thanks, Louie. So first off, say we're really excited about our drone armor solution. We recently achieved technology readiness Level 9. And this solution has been proven to protect personnel basis and assets from drone threats. It's built on a modular open system architecture. And where we're unique, it really allows for a lot of customization and adaptation to various mission requirements. We also use artificial intelligence and machine learning for enhanced decision-making and to reduce the cognitive workload. And we have a core command and control component.

We had the opportunity to demonstrate our drone armor recently when the Department of Homeland Security and all of their components visited our [indiscernible] plant facility. We see opportunities, not just with the department estate, which -- who we're currently providing those solutions to but also with Department of Homeland Security and then for protection of FAA sites as well. So broad market area.

Great. And Carey, you recently visited the Middle East. What are you hearing in terms of the demand for mega projects? There's been speculation that some of the megaprojects on the transportation side could convert towards like data center builds, but what are you hearing on the ground in the Middle East?

Yes, we had a great visit to the Middle East. We went to Saudi Arabia as well as the UAE in January. And I think, Louis, what you're referring to, Saudi is taking a move, what I would call towards fiscal discipline and they're prioritizing projects that are tied to the immediate upcoming global events like the 2030 World Expo and the 2034 FIFA World Cup. And they're scaling back or delaying some of what I would call the more speculative longer-term real estate ventures. Again, in the Middle East, we've had 4 years consecutive double-digit growth. So we continue to rapidly expand. And we are on all the giga projects within Saudi Arabia.

We're the #1 program manager in Saudi Arabia, UAE as well as Qatar. And there's got to be a lot of spend there coming up in all of those -- we've moved our business not just from doing urban development and transportation as we've historically done, but we've gotten into the defense, the border security and the tourism and hospitality sectors as well as industrial manufacturing.

One thing I will note for us a couple of years ago, we made a very smart decision, which was to focus on programs around Riyadh. So we've been awarded a lot of those such as King [indiscernible] Park, King Abdullah Financial District, [indiscernible] some roads, [indiscernible] traffic management, [indiscernible] International Airport and most recently, New Maraba. And that's where, again, they will spend the money.

But I will say following Saudi Vision 2030, there will be a Saudi Vision 2040 where they'll go back to looking at some of the longer-term real estate projects, things like Neon or some of the growth like [indiscernible] and other tourism locations. We see growth in the Middle East for decades to come.

And merging my first question and second question, with the World Expo and the World Cup, are you able to provide some of your own like intellectual property technology solutions to the Middle East as well? Are you able to export drone armor to the Middle East? And are you able to utilize some of your transportation modernization solutions such as iNet in the Middle East in addition to being a program manager?

Yes, we're able to offer quite a few capabilities for the events that are coming up in the Middle East. On the federal side, we obviously have to go through the [indiscernible] and the technical assistance agreement process to get releasability for that. But we are already able to offer the iNet solution, which does not fall under the ITAR. And as I mentioned, we're using traffic management around Read. And we see that system being further deployed. Given that we did the traffic management for the Qatar World Cup and it was very successful. And we were also involved in to buy both on the Metro as well as overall construction management services, we see potential plays in those areas as well.

Then on the federal side, we would look at things like electronic security systems, potentially biometrics capability. And if we had releasability for something like counter unmanned air systems. Those are all offerings that we could provide. Parsons has been involved in every world events since the 2016 Atlanta Olympics. So we look forward to helping the Middle East as well as the United States and Canada with the upcoming events.

Our next question coming from the line of Gavin Parsons with UBS.

If I exclude the confidential contract last year, you still had to revise Federal Solutions revenue guide down a couple of times. So any common theme you can identify that was driving that? And have you taken any different approaches to framing the '26 Federal Solutions guide?

Yes. I would say in Federal Solutions, we definitely were impacted by the shutdown. There were slower procurement activity leading up to the shutdown as well. Specifically, we had 2 contracts, our Airbase, Air Defense as well as our Joint Cyber Hunt Kit that were delayed and that -- a lot of material volume. As you know, materials can be lumpy. I think what we're seeing right now is a positive procurement environment. The fact that we were able to get 6 awards greater than $100 million booked for federal between Q4 and early Q1. And as I mentioned earlier, a strong book-to-bill of greater than [indiscernible] for federal as anticipated for the first half of 2026.

And Gavin, I would just add to everything Carey said, but on top of that, I think when it comes to kind of new, new, we're kind of getting used to the cadence and the amount of time it gets to the award. So kind of maybe a little bit more conservatism on timing of new, new and a little bit more bullishness on contract growth and things like that. So it kind of nets out a little bit, but the new new is a more difficult environment today than it was prior administration.

Okay. That's helpful. And I appreciate the guidance or color on quarterly cadence for the year. It looks like there's a pretty big step up in 2Q from 1Q. What's driving that?

Yes. Biggest driver there, Gavin, is mainly the Middle East. In the Middle East, in 2025, the holidays spanned over Q1 and Q2. In 2026, it's all within Q1. So you'll see kind of Middle East kind of flattish in Q1 and then almost 20% growth in Q2. But first half is kind of bracketed in a balanced way.

Our next question coming from the line of John Godyn with Citi.

I wanted to follow up a little bit on the margin outlook. There were a few drivers on Slide 15, things like operating leverage, growth in margin accretive contracts, growth in high-margin markets. I was hoping you could dig into those a bit more and elaborate. I'm just curious if you think there's potential for upside to margin guidance for the year?

Yes. I would say, obviously, we're really happy with over the last 2 years, 110 basis points of margin expansion kind of well ahead of our our Investor Day targets. So I'd say, again, kind of 2024 and 2025 outperformed 2026. We have about $350 million worth of headwind from that confidential program, which was accretive, of course, to the company margins. And so we're competing against that a little bit. But overall, I think great news is in 2025, net EAC adjustments was down about 50%, so an improvement of about 50%. So really great performance across the company.

So yes, I think there is -- as we expand on products as we have additional accretive M&A and to your point, leverages are all great opportunities to continue to expand margin.

Okay. Great. And you also mentioned that you're targeting double-digit margins for the enterprise, you're not far away from that. That's not a surprise. I'm just curious infrastructure is already there. Federal, isn't. Do you think both segments will be at the double-digit margins? Or is this going to be more of a barbell where infrastructure continues to move higher and drag the company average up?

I suspect for the period, infrastructure will remain higher in kind of north of 10%. And to Carey's point earlier, about 10.5% in 2026 at the midpoint. Federal, of course, is always really driven by the mix of work, cost-plus versus fixed price. And so we are seeing faster growth on cost plus in the federal area. The opportunities, again, as we expand on products. The product deliveries is a great opportunity to expand margins in federal. But overall, right now, we see federal in kind of high 8s, low 9s short term and trending towards mid 9s longer term.

Our next question coming from the line of Sheila Kahyaoglu with Jefferies.

I know it's been asked in a few ways, but just on 2026, Carey, Matt, any sort of color on the largest program movers that are growing in '26 from whether it's a contract area or -- a particular contract or a specific area?

Yes. Thanks, Sheila. So again, I would kind of go back for the federal side to highlight some of the key wins that we've had, Joint Cyber Hunt Kit would be one of those. We highlighted 2 Class 5 wins. The $392 million contract was a takeaway from another company. And the $200 million one represents a brand-new work for us. We're also expecting continued growth on our GSA schedules as well. And then within the Middle East, it would be the contracts that we've won recently, including airport contract, the Riyadh Traffic Management contract, [indiscernible] contracts, those are also going to be ramping up.

And then within Critical Infrastructure, North America, it's kind of across the board, a lot of the major contracts like newer [indiscernible] train, Hawaii rail and transit and some of the larger programs.

Got it. And then maybe a bigger picture question for you, Carey, just given one of your competitors preannounced negative this morning, we're seeing sort of a dichotomy between IT services, CACI at the high end, [indiscernible] kind of there along with it. And declines as well in the sector. So where are you seeing areas that are improving in the government budget and where you're shifting your portfolio to? Clearly, Critical Infrastructure is good, but within the federal side, maybe any additional color on how you're trying to shift that $11 billion on book pipeline to convert into revenues?

Yes. I would say we're very fortunate in federal, and that's why we're very bullish on strong book-to-bill as we come into 2026 within Federal, and we started to see these large awards go through well aligned with the key areas of focus, both under the National Defense Strategy as well as what's in the reconciliation budget. And those dollars are going to have to get spent. So whether you're looking at areas like Golden Dome or boarder security or counter unmanned air systems, biometrics, end-to-end cyber operations and an electric magnetic spectrum space, we're very well positioned. And if you look at reconciliation alone, we believe that we have about $85 billion of addressable market for Parsons. So I feel our portfolio is well aligned for 2026 and beyond.

[Operator Instructions] Our next question coming from the line of Andrew Wittmann with Baird.

Great. So I wanted to ask about the outlook for Critical Infrastructure's backlog. And specifically, Carey, you just mentioned some of those larger projects that you've won over the last year or 2 Hawaii, Newark AirTrain, Georgia State Route. There's a bunch of them in there that are obviously very significant and have been very powerful drivers. Those are getting into bigger burn stages now. You made a comment on your federal first half bookings, but I was wondering if you think that with the ramping burn rate, if you think the book-to-bill in CI can still remain over one in the first half or even for the full year? And just kind of moving parts as you look at your pipeline there and your recent win rates, please?

Yes. So we have planned for Critical Infrastructure book-to-bill to remain over [ 10 ] for 2020. again, resting on 21 consecutive quarters of greater than 10 and the demand that we see both in North America as well as in the Middle East.

Okay. Great. And then just as a follow-up, I guess maybe I wanted to kind of have you zoom in on a few projects, which have been in the headlines or are notable today. One of them is Golden Dome, and you've referenced this, and obviously, you're one of many, many contractors [indiscernible] very large contracts. I was just wondering what you're seeing there in terms of your ability to win task orders, how that's in your backlog today, if at all? And maybe just how Parsons is or is not affected by the turmoil surrounding the Hudson River tunnel project, which has obviously been a lot of fits and starts here even here in recent days?

Yes, let me take the Hudson River tunnel question first. So last week, the U.S. District judge ordered the funding restored. And so that would have forced the Trump administration to lift the 4-month freeze on federal funding. But then on Monday, she issued an administrative stay which basically leaves the tunnel construction on hold until February 12 at 5:00 p.m. and preserving the status quo while the U.S. [indiscernible] appeals for the second circuit is considering whether [indiscernible]. So the outcome is if the Appeal's court grants us stay, the funding freeze would remain in place during the appeal. If it does not, the judges injunction barring enforcement the funding suspension is set to take effect again at 5:00 p.m. on February 12, and that would allow federal disbursements to move forward. It's important to note that this contract represents less than 0.5% of Parson's revenue.

On to your second question, within Golden dome, I'd say our biggest play there is our role that we have with the Missile Defense Agency. Again, we're the system engineering and integration contractor for the missile defense agency. So we expect, and we have been doing some work relative to Golden Dome on that contract. And secondly, I would say nonkinetic effects, the use of cyber and electronic warfare instead of kinetics to kinetics is a growth opportunity for us.

Air-based aerodefense is another one. We're providing protection of air-based air defense for the Air Force base in Europe. And you can think about that as being similar to what's going to be needed to provide the local area of defense here within the U.S. and the Golden Dome program.

And then I'd say we also have some cyber efforts. Golden Dome has been starting to roll out. It's been a little slow, but the classified architecture has been released. General [indiscernible] line is confirmed and running the program. There's been a 4-layer kind of strategy that's defined, which is a layer distributed and software-defined. There's been command and control integration task force worked off, and there's a few small contracts for space-based interceptors, but our key play is really system engineering and integration.

[Operator Instructions] Our next question coming from the line of Tobey Sommer with Truist.

I'm curious what in 2026, do you expect in terms of changes in revenue and profit from the FAA customer?

Yes. So we do expect growth on our FAA Technical Support Services contract. And again, they exercise the option nearly a year early, which we were pleased with for $593 million over the next 3 years. We've supported the FAA for 5 decades. And currently, we're on the technical support service contract, $1.8 billion contract over 10 years. We have over 500 FAA cleared personnel that support engineering, construction, environmental equipment installation. We're located at over, what thousands of FAA sites. So it's pretty much all the national airspace sites including [indiscernible], radar sites, communication sites, and military installations.

And then we also have a team that includes over 300 subcontractors. There's a lot of money that's been put in $12.5 billion to modernize the air traffic control center. And so we look forward to continuing our roles [indiscernible] implementer for that work for the FAA.

Thanks, Carey. And then you did talk about areas of sort of growth this year within federal. But I was wondering do -- do you -- would your answer be the same for areas that are likely to sort of spearhead the greater than one book-to-bill in the first half? Would they map against Cyber Kit and GSA schedules that you commented on earlier?

Yes, they would be in the same areas of the Joint Cyber Hunt Kit program. Obviously, the FAA award will get booked in the first quarter. Those are the 2 that we announced after the fourth quarter ended. But once again, all of our market areas are growing, whether it's cyber and electronic warfare, space and missile defense market or critical infrastructure protection.

And the last question for me. What's your -- what's the most attractive area for the company to apply capital to in the form of acquisitions over the balance of the year?

Yes. So we'll continue to look in similar areas. I'd say on the federal side, [indiscernible] is a great example where they hit a lot of points, cyber, signals intelligence, space capabilities. And then also, they broadened our customer reach, particularly with the intelligence community customer and also NASIC, National Air and Space, that's out of Dayton, Ohio. So that's a good example of a federal one, and that builds upon companies that we've bought in the past like Black Signal, Blackhorse and CTI and it broadens our all domain capabilities.

Within Critical Infrastructure, we're going to continue to look the water space. We're also going to continue to double down on transportation engineering and specifically looking across our 6 Tier 1 states, Florida, Texas, California, New York, New Jersey and Georgia.

I'm going to sneak one more in if I could. Do you -- does the company have an interest in expanding and amplifying its ability in Critical Infrastructure to participate in what looks like a global increase in demand for nuclear energy?

We have a small footprint in nuclear today, and it is expected to grow as you indicate both in the United States as well as in the Middle East. We're currently the Department of Energy, National Nuclear Security Administration engineering and construction management services contractor. And we're also starting to look at some small micro raptor type of projects. There's a few bids out on those. We also do micro [indiscernible] work. For example, we have a program in Puerto Rico that's been going -- growing quite well. And then within the Middle East, we're having discussions with companies because they're going to be making a large investment in nuclear.

Our next question coming from the line of Gavin Parsons with UBS.

I just wanted to ask on the medium-term growth targets. First, what are you assuming -- what are you assuming for the DoW budget growth? Or is that based on reconciliation flow through? And then second, is that mid-single digit plus just a blend of the end markets? And does that not contemplate any potential for market share?

I will answer the first part, and then Matt will answer the second. But I would say from a budget request, -- we've got, again, very strong alignment to the reconciliation budgets, both for Department of Homeland Security as well as Department of War and we see about $85 billion -- and for the FAA, we see about $85 billion of that being addressable for persons. As we look forward to FY '27, President Trump has announced he would like to have a $1.5 trillion defense budget. That would represent a historic 50% increase over the $1 trillion that was authorized for FY '26. There are some arguments that you can say might happen because there's a lot of executive commitment to the priorities such as Golden Dome and Golden Fleet there is congressional support, particularly coming from the GOP for a higher budget.

And then the Republicans are also taking a look at a second potential reconciliation budget that might be like $450 billion to $600 billion. On the areas that -- reasons that FY '27 may not reach the full amount, there's obviously fiscal concerns that the increase would add about $5.8 trillion to the national debt over a decade. And then depending on what happens with the upcoming election. So we're watching that closely, but I would say we feel very good about FY '26, the One Big Beautiful Bill at and the reconciliation funding starting to flow, and there's clearly momentum towards a larger FY '27.

Yes. Gavin, I would just add to your point, the CAGRs within our markets are pretty strong, kind of averaging in that 6.5% range, but higher win rates that we have flown through the plan over the next few years, would assume some takeaway as well.

Thank you. And that's all the time we have our question-and-answer session today. I will now turn the call back over to Dave for any closing comments.

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 catching up with many of you over the coming weeks. And with that, we'll end today's call. Have a great day.

Ladies and gentlemen, that does conclude conference for today. Thank you for your participation. You may now disconnect.

Good morning, everyone. Thanks so much for joining us. Really happy to have Parsons here to take us through the story. We have the company's CEO, Carey Smith.

Carey, thanks for joining us today.

Thanks. Great to be back, Brian.

We're going to do fireside as you can probably tell from our setup here. Please have some questions loaded up, though, if there's any time at the end. Carey, why don't you just level set us to the story?

Certainly. So Parsons, we report in 2 segments. We're about 51% Federal Solutions, 49% Critical Infrastructure. We have 6 end markets, cyber and electronic warfare, where we're one of the leaders in offensive cyber and also the ability to converge cyber and electronic warfare in areas like non-kinetic effects. That business comprises 20% of the Parson's revenue. We're involved in space and missile defense. We have been the system engineering and integration contractor for the Missile Defense Agency for 4 decades.

An important role as you start to look forward to Golden Dome and the money that's in the One Big Beautiful Bill. In the space domain, we provide ground systems. We've done over 170 different ground systems. We developed a unique solution where we can actually commercially operate large satellite vehicles, and we do assured position, navigation and timing. We're also involved in space domain awareness, and we just received the Space Icon award, in fact, this week for the work that we've done with Department of Commerce, and that comprises about 10% of our business.

We're in Critical Infrastructure protection. That's about another 10% of the company's revenue, where we're involved in counter unmanned air systems, #1 provider for Department of State. We also do electronic security, physical security systems, #1 with state, #1 with the Army and #3 with the Air Force. Transportation, 28% of the company's revenue. We're involved in over 450 airports, 450 rail and transit projects. We've done over 17,000 miles of road and highway work across 6 continents. And we also do intelligent transportation systems.

We're just awarded our first deployment in the Middle East for that area. We do about 15% of our business in water and environment, just acquired a company, which we can talk about later, Applied Sciences, which is involved in water remediation efforts in Florida. And then the final area would be urban development that comprised about 13% of the company's revenue. Most of the work that we do there is over in the Middle East, where we're involved in almost every major project going on today in Saudi Arabia. And I would also highlight, we are the #1 program manager in the world as ranked by engineering news record.

Well, that's quite a resume. Hopefully, everyone got that down. Carey, the biggest driver after 2 phenomenal years in '23 and '24, the biggest driver of the business this year was the confidential contract. It caused growth to turn negative after 20-plus percent growth in the prior 2 years. Can you remind the audience about the dollar and percentage headwinds that, that caused? Maybe talk about growth, excluding that contract, and really how you -- when that contract anniversaries and the company will be back to an as-reported organic number?

Yes. So first, I'd say we're really excited that for the last 3 years, excluding the confidential contract, we have been the industry organic growth leader in both of our segments. This year, anticipating 14% total growth at the company level, 9% organic growth. And then we've been very clear going into 2026 that we expect mid-single digits or better. So still extremely strong growth across the company as we've been demonstrating.

The confidential contract was about $355 million this year, and that's starting to diminish. It's going to be about $20 million in the fourth quarter and then next year for the first 2 months, maybe $10 million to $15 million, and it will end in February.

Fantastic. Let's talk to -- let's pivot to another contract with the FAA. Recent contract award to a competitor of yours. You've historically had a sizable footprint at the FAA. Would you maybe discuss what happens with your existing contracts from a scope, duration and growth perspective? And are there new opportunities that you could be part of this air traffic control network in a different capacity than lead integrator? And if so, maybe how should we think about the timing and sizing of that?

Yes. So first, I'd say we've been happy to support the FAA as our customer for 5 decades. We've been on the technical support service contract for the last 24 years since 2001, and we've had excellent past performance on that contract. So when you look at the scope of the brand-new air traffic control system, there are, in essence, 2 parts. There's an integrator part, but there's also an implementer part. So if you think implementer, that's the role that we have played with the FAA in the past.

We anticipate growth in that area as a result of this contract when that would be new work for us. So we're currently present in over 600 locations. We do things like site surveys, we do installation work. We do all the logistics. We do safety work. We're also involved in fire protection, but everything that goes on at all those facility sites. That will grow as all the brand new air traffic control systems. As an example, there will be the purchase of 619 radar systems. Those are going to have to get installed at each of the facilities.

So we look forward to continuing to support the FAA in this critical mission and making sure that our national aerospace system remains safe for the traveling public.

How would we think about the contract flow through to Parsons? Does it require new vehicles or you have the existing ceiling or...

Yes. So we were awarded a $1.8 billion contract in April of 2023. That contract runs for 10 years until April of 2033. So they can just continue to award work on that existing vehicle.

Fantastic.

And I should comment, we have $1 billion ceiling remaining.

$1 billion left. Perfect. I want to talk about some of the other growth areas. You mentioned a lot as you were introducing the company to folks. Can you maybe help us what your top 4 growth areas for '26 are and what the timing of that looks like and how investors should be looking at the business going forward?

Yes. So I'd have to say the fastest-growing area would be our Critical Infrastructure business. And I'm going to say in totality, whether it's within the transportation sector, the water and environment sector or the urban development sector, both infrastructure North America as well as infrastructure Middle East are going to be double-digit growers this year. The Middle East, this is their fourth consecutive year of double-digit growth.

And the nice thing for that organization is that we have long-term tailwinds. So within the U.S., the Infrastructure Investment and Jobs Act was passed in November 2021, but that's not going to hit its peak until 2028, then you have a 6-to-8-year tail after that. In parallel, you're going to have the new 5-year surface transportation reauthorization bill ramping up. And then if you look at the Middle East, we like the $1.2 trillion in the U.S. We're expecting $1.5 trillion in the Middle East. So particularly in Saudi as we prepare for the 2030 Expo and for the 2034 World Cup, we're going to see tremendous tailwinds.

I would say the #2 priority would be probably border security. Border security received about $160 billion within the reconciliation bill. Parsons has been involved in border security programs all over the world. We do work with Defense Threat Reduction Agency in countries like Jordan. We've done Armenia. We've done Georgia. We've done Lebanon. We also do work with Department of Energy for the counter nuclear smuggling detection and deterrence. That's a $1 billion ceiling contract, and there's only 2 awardees.

And we've also done work at land ports of entry and along the southern border. So that would probably be my second priority. Third, I would say, would be the Golden Dome for America, North -- [ infected ] North America, not just the U.S. but also with Canada, where we have a big presence. As the Missile Defense Agency system engineering and integration contractor, the big part of the Golden Dome effort initially is going to be on that integration piece. So we would anticipate use on our vehicle. Once again, we have a $1 billion ceiling remaining, and that vehicle runs until January 2029.

We also are involved in non-kinetic effects, as I mentioned earlier, cyber and electronic warfare, how do you take out a missile without using missile to missile system. We're participating on some of the space-based interceptor activity, and we're looking at the battle management command and control growth as well.

Fourth area would be cyber. The national security strategy was just released by the Department of War. And one of the biggest effects of -- challenges is still deterrence of China. That's really how we've purpose-built our federal company is how do we deter and outpace near-peer threats through cyber techniques, electronic warfare, signals intelligence and information operations and offensive cyber being a critical component of that. And it's hard, Brian, to be honest with you, to stop it for because I'm so excited about where the...

But don't let me stop here. You can go one deeper if you want. We have time for that.

I would say another growth area that we're excited about would be PFOS, PFAS, emerging contaminant elimination. We see that as a $40 billion addressable market for the company out of a total market size of $220 billion. We've developed a technology. It's called the Hot ISCO technology that actually destroys the PFAS molecule on spot. That has now been patented in Canada and in the United States, and we've had our first deployments of the technology.

And then I would highlight rebuild of Syria, Ukraine and eventually Israel, Gaza, Syria being the first. Parsons is the company that did the chemical weapons elimination, Phase 1, there's going to be a Phase 2 of that, and then there will be the rebuild of Syria. And we anticipate that the Gulf consortium countries are going to be the ones that are going to pay for that rebuild. Obviously, with our extensive presence in the Middle East, that helps.

And then 2 more quickly, but I would say Army munitions is another big area for us. We're currently present at Radford and Holston. Those are 2 of the 5 top Army ammunition munition plants within the United States. We've won 4 of 4 projects there, so expecting growth.

And then the INDOPACOM region, the Pacific Deterrence Initiative was initially set up for $18 billion. Within the reconciliation bill, there's an additional $12 billion. We've been out in that region for over 3 decades. So we do both infrastructure work as well as cyber electronic warfare and signals intelligence. So again, exciting time for the company with a lot of growth vectors.

If I could just maybe pull on just one of the common threads here. When I was in D.C. a few weeks ago, a lot about border security, encounter UAS in that whole construct. And then just last week, the Shield contract was awarded for Golden Dome. Can you maybe help us understand how that matriculates through to contract awards and activity and how people should think about the timing for some of these things?

Yes. I would say on Golden Dome first, again, I think there's going to be more systems procurement. So if you think about that, Patriots, ground-based interceptors and a lot of integration going on. And then there's going to be an immediate focus sort of on local area defense. I would equate the local area defense to our Air Base Air Defense program that we have established in Europe, which is how we're protecting Air Force bases. It's kind of similar to how you might come in and protect the city from an architecture perspective.

Shield was very broad. It has $150 billion ceiling over 1,000 awards. It was more kind of a broad-based capabilities, but I believe what's going to happen immediately is using existing contracts and getting existing work out.

Makes a lot of sense. I want to zoom into the President with a near-term question here. On the last call, you talked about some disruption from the government shutdown and -- but at the same time, you still guided an acceleration in your fourth quarter here coming up. Can you walk us through the components that are driving the sequential acceleration in your Federal Services segment? And maybe if the length of the shutdown is causing that recovery to be a bit more elongated?

Yes. So first, again, 51% of our company doesn't fall under the federal government. So we're only talking about the 49% that it does. But I would say the growth that we were anticipating is sort of in 3 areas. The first one is the Air Base Air Defense contract that I just mentioned, we've been awarded some new task orders on that vehicle. So we're seeing growth there.

Our Federal Aviation Administration contract, TSC 5 without the brand new air traffic control system was also accelerating throughout the fourth quarter. And then the last one is we were awaiting an award, which we received a success memo on. This one is kind of exciting because there were 100 offers on another transaction agreement. It was necked down to 3 prototypes. And we were awarded the Joint Cyber Hunt kit program. We're awaiting the LRIP contract, but that's a $500 million over 3-year product sales. So it's higher margins, and it's accretive.

So those are the critical elements within federal. As far as shutdown, we are glad it's over. And hopefully, we don't have another one as we go into January 30. We need to get the last 9 bills passed. But I would say people are coming back to the office. It is a little bit slow still in terms of contracting actions, and we're very focused on collecting our cash.

Right. We typically see cash slowdown at this time of year for those situations. Let's maybe zoom now, take the counterbalance of that question and zoom out longer-term view. Remind the group of really what your growth algorithm is organic versus inorganic, how much margin leverage you can realize as you scale up bigger and really what the primary levers are to expand margins towards the top end of that peer group, which is 11% or 12% on an EBITDA basis.

Yes. So on the organic growth first, I would say, once again, we've been for 3 years consecutively the industry leader in organic growth in both of our segments, excluding the confidential contract. We have been very consistent as we go into 2026, we're going to grow mid-single digits or better. That doesn't include any big game changer opportunities that we might be awarded. That is strictly core business, delivering, executing as we have consistently done.

Inorganically, we've bought 16 companies since 2017. This year, we acquired 3 companies: TRS Group in the first quarter that's focused on PFOS, PFAS and thermal remediation. We acquired Chesapeake Technology International, enhanced our cyber electronic warfare, signal intelligence, but most importantly, has a great presence in the INDOPACOM region, also a great presence with Special Operations Command, then most recently Applied Sciences Consulting. And they're involved in water remediation efforts and heavy presence within Florida on resiliency.

We expect to continue to do more M&A, although, I will say with the stock dislocation, we are going to focus on share repurchases right now as well. But we have an active M&A pipeline and expect to be able to drive more organic growth. You can see us doing between 2 to 4 acquisitions in any given year.

Margins. On margins, I would say our federal margins are kind of about where we would expect them to be based on a 60-40 split, which is cost reimbursable to fixed price T&M mix within there. Where we will get margin growth on the federal side of the house is going to be through additional product sales, such as the earlier one that I mentioned on Joint Cyber Hunt Kit or the work that we're doing on assured position, navigation and timing through our Globalstar partnership that we have.

We would also get a lift through M&A because when we buy companies, we're buying companies that have greater than 10% EBITDA margin and also through operating leverage where we've been able to control our costs as our revenues increase. Similarly, I'd say, on the Critical Infrastructure side of the house, but I would add on the infrastructure side of the house, demand is so much greater than supply. So as you start to look at some of our new programs coming in, we have been able to get margin lift.

We have lifted our margins overall as a company, 50 basis points last year, an additional 50 basis points this year. And really happy with the Critical Infrastructure business, which has delivered over 10% margins for 3 consecutive quarters through outstanding performance execution.

You've done a really nice job on that Critical Infrastructure piece. Maybe let's pivot to that business a little bit, not only the margin execution, but the growth rate has been mid-teens, 20 consecutive book-to-bills greater than 1. Maybe talk about the durability of this cycle. It sounds like it's a very elongated cycle with years in front of it still. And then maybe where you're seeing the biggest pockets of activity, whether it's transportation, water. And then maybe give us a regional flavor for where things are coming, either Middle East or North America or how you're looking at it?

Yes. So I'd say, first at the company level, we're really proud of the fact that we've been greater than 1.0 trailing 12-month book-to-bill since we IPO-ed back in May of 2019. And as you point out, 20 consecutive quarters greater than [ 1.0 ] within Critical Infrastructure. Demand is really across the board. Additional -- as we saw a shift within the United States back to what I'm going to call hard infrastructure away from areas like climate change, electrification, broadband where Parsons does not play, back to a refocus on roads and highways, airports, bridges, those are the areas that we're involved in, rail and transit. So that kind of plays to our strength, and that's where the money has been going.

In the Middle East, we're going to see a lot of long tailwinds. The important thing right now is to get ready for the 2030 Expo in Saudi, the 2034 World Cup that's going to occur. We've been heavily focused on programs that are around Riyadh because they're going to be on the world stage, and those programs have to get done first. So as any reprioritization were to occur in Saudi, you're still going to deliver on those programs.

So if you think about Diriyah Gates, restoration of Saudi's history; King Salman Park, 5x the size of Central Park; Qiddiya, the world's largest entertainment city. We were just awarded King Salman International Airport, where we're going to have 108 million passengers by 2030, same size as Atlanta, the world's busiest airport, 150 million passengers by 2050. We'll be the world's largest airport.

We did the Metro project, which is still underway, quite a success done in a very short period of time. We were just awarded the traffic management that's around Riyadh. So it's our first deployment of our advanced traffic management system within the Middle East, quite exciting. So I would say that's the significant growth we're seeing there, but not to leave out the UAE and Qatar because we're growing double digits within all 3 countries.

In the UAE, we're seeing a lot of development. There are a lot of people moving there. So we're actually building manmade islands for people to live on and designing a lot of new mixed-use development areas. And then within Qatar, we've been very busy, not just in Doha, but also in the city of Lusail, which is going to be focusing more on tourism and entertainment. We've diversified within the Middle East, too. So traditionally, we've done transportation projects in urban development.

We were awarded a project with the Ministry of Defense. It's a critical infrastructure project within Saudi. We also were awarded a border security project within Saudi Arabia, again, strengthening our border security credentials. And then finally, we're awarded a project in tourism and hospitality to convert some palaces to hotels.

A lot going on in the Middle East, definitely. Let's maybe -- I think you teased it a little bit, but let's talk about capital allocation. I think your leverage is about 1.4x. You've done kind of a few deals each year, 2 to 4. So they've been reasonably sized. How are we thinking about -- you mentioned the stock dislocation. How are we looking at maybe 2 things, one, what the pipeline looks like from an M&A perspective? Is there a leaning towards one segment or the other where you would do more deals? And then third, how are you now balancing a potential stock buyback going forward?

Yes. So I'll take the second part first. We are authorized by the Board for $250 million. As of the end of the third quarter, we had $185 million remaining in share repurchase. We do plan to be more active as we go into the fourth quarter given the stock relocation. On the second question, we have an excellent pipeline. I was hoping to close 4 deals this year, but stay tuned.

And I would say we've got opportunities on both the Federal and the Critical Infrastructure side of the house. 4 of our last 6 deals were on the Critical Infrastructure side of the house, but I still like a lot of the federal deals because they're high technology, and we can take that technology and we can apply it across the business.

So you can expect to see us likely do a deal that is still in kind of that cyber, EW, signals intelligence area that expands our presence with the intelligence community.

Great areas to be in. Carey, this is your moment to shine here, the drop the mic moment. So go ahead, no follow-up for me, talk directly to investors here and on the Internet and tell them why they should consider Parsons as an investment.

But I'll miss the follow-up. So I would say why you should consider Parsons as an investment. Again, we have been the leading industry organic growth driver for the last 3 years, excluding the confidential contract. That's in both segments. We have strong tailwinds across the business. I highlighted all of our growth areas within North America and the federal side with the One Big Beautiful Reconciliation Bill, where we are very much aligned to all the elements that got funded there, whether it's border security, Golden Dome for America, INDOPACOM, army munitions, et cetera.

Within the infrastructure side of the house in North America, very well aligned to the hard infrastructure, where the money is going to be spent under the IIJA as well as the next 5-year surface transportation reauthorization bill. Within the Middle East, I just talked about it, but very exciting times there that's going to go on for decades of growth. I'm really proud of our presence that we've had over there for 65 years, 50-year partnership with our Saudi Arabia partner.

Margin expansion, we've been consistent, 50 basis points last year, 50 basis points this year, another 10 to 20 anticipated as we go into next year. Book-to-bill, the company over 1.0 trailing 12 month since IPO, Critical Infrastructure greater than 1.0, 20 consecutive quarters. Biggest pipeline we've ever had in the company, $58 billion. We've moved up the value chain just as we said, as a solutions integrator. We're differentiating with software. We're in a position now that we can bid prime and win larger projects.

Then I'd highlight our consistent cash flow over the last couple of years, 115% to 120%. So very consistent and great capital deployment. I think M&A has really helped us move up that value chain and definitely transformed our company. So exciting time at Parsons.

It sounds great. Well said, Carey, thank you so much for joining us today. And thanks, everyone, out there for your interest. We do have time for a question or 2, if anyone has one in the audience. Yes, please.

Can I just ask about -- you mentioned [indiscernible]

Sure. So within PFOS, PFAS, we've had a research laboratory in Syracuse, New York for 3 decades that we've been focused on improving, I'm going to say, quality of water, quality of soil. We hold several patents within the PFOS, PFAS area. The most important one is the Hot ISCO technology, which we have deployed. It basically breaks the PFAS molecule on site without requiring incineration. We see this as a $40 billion addressable market for Parsons out of a total $220 billion market.

On the Critical Infrastructure side of the house, we will sell to airports, we'll sell to industrial customers and also water customers. And then on the federal side of the house, we'll sell to the Federal Aviation Administration and the Department of Defense. On both sides of the house, we already have contracts in place, master service agreements or indefinite delivery, indefinite quantity vehicles. We're involved in every aspect of the life cycle.

So we do investigations. We've done over 2,000 investigations and over 7,000 point-of-use investigations. Then we can come in and we can do the remediation and treatment and also the follow-on monitoring and support. The federal MCL levels have not been changed. They're still at a consistent level. What has happened is the time line for implementation from the federal government has been stretched. We always felt that it was going to be elongated. So we always indicated 2032 is our expectation for a peak in that market.

In addition to the federal, you also have 34 states that have their own regulations. So we see this as an exciting area for the company. Thank you.

Great. Carey, thanks so much.

Thanks, Brian.

All right. Good afternoon, everybody. We'll keep forging ahead in the aerospace and defense sector with our next presentation from Parsons. And with me on the stage here is Carey Smith, who is the CEO; and Matt Ofilos, who is the CFO. So Carey and Matt, thanks so much for joining me here today.

Thanks for having us back, Noah.

It's great to have you. Maybe just starting high level at the sort of industry end market level and the backdrop and environment. We've had DOGE and similar efforts. Then we had a government shutdown. Where are we now? Are things normal? Are they close to normal? Are they still completely abnormal? What are you seeing in the marketplace?

Sure. So I would say with DOGE, I think that's pretty much behind us. I will say it affected a lot of the companies in our sector. From a Parsons perspective, we were very fortunate because we were not impacted by DOGE other than that our stock price went down with our peers but we did not have any contracts that were terminated or canceled. And the main reason is because we're a solutions-oriented company. We don't do IT work and we don't do consulting work. So we really weren't on their target list. But I do think that's behind us.

Relative to the shutdown, we're happy that's behind us for now. And hopefully, it will be behind us as we approach January 30, and the last 9 bills will be able to be passed so that we can continue to operate. I would say things are slowly getting back to normal. We're still seeing a little bit of delays in terms of award and contract actions. And then we're going to obviously be going after our cash for the remainder of the year. Fortunately, 50% of our business is not federal government though, and so really hasn't been impacted by that.

On a positive note, I would say the reconciliation bill passage and starting to see the funds flow is very important for us for border security, $25 billion for Golden Dome, another $21 billion for the Pacific Deterrence Initiative or INDOPACOM region, $12.5 billion for the Federal Aviation modernization brand new air traffic control system. And then another 12 -- I'm sorry, $21 million was for the Army munitions and then $12 million for the INDOPACOM region. So when you look at each of those areas, Parsons is very fortunate that our portfolio is aligned to that. So we have very good strong tailwinds as we go into 2026.

Have you studied those numbers previously?

A few times.

Okay. Good. I want to talk about each of those but maybe just, Matt, on the rest of the year and into next year, I just wanted to get your updated thinking on growth in Federal Solutions. And you have the confidential program that's now rolled out of the business. For the rest of this year, I think you still have, FS, if you call it, kind of core, excluding confidential at a pretty high growth rate to finish the year. Can you do that with this -- we got a spool back up from government shutdown. And then as we go into '26, how should we think about FS core? And then what is the confidential headwind that everybody will need to attempt to model correctly when trying to model FS in 2026?

Yes. So to your point, Noah, Q4 is strong growth within our Federal segment. It is -- I don't want to call it a layup by any means but we do have clear line of sight to mid-teens growth in Federal for Q4 in order to get to the midpoint of guide. Obviously, some pressure coming out of the shutdown. What we've seen really is just slower contracting actions. So things that we thought would get done in late summer, early fall have kind of just continued to slip. Everything is, hey, next week, this will come in, next week, that will come in. But we still have line of sight to that midpoint, of course.

The way we put guidance together was the low end would consider kind of a shutdown through year-end. And so we feel pretty comfortable that kind of that's a good balance for us. So the shutdown being behind us, to Carey's point, is a good thing, and we're just pushing hard with our contracting officers to get back on track. We did have some kind of built-up materials and products deliveries that were scheduled for kind of late Q3, early Q4. And so those are all going to -- still intended to deliver before year-end. That will help get the federal growth up into that mid-teens growth, not too far off from where we were in Q3.

When we look at 2026, the contribution from the confidential contract in total for 2025 will be about $350 million, $285 million of that is in the first half. So the kind of the headwind is all in the first half. We feel really good about the overall portfolio. Carey, I'm sure we'll get into more details about some of these large game-changing type opportunities. What we've said publicly is kind of mid-single-digit or better growth just on the core business and continue to execute on backlog growth, IDIQs that we have. I think we're seeing with the customers, the easy button is a really great place to be where you can get work done on existing vehicles. So we're lucky enough to have over $11 billion worth of work awarded to Parsons that's still not quite in backlog, just waiting on task orders to be awarded.

And so we just have a lot of capacity within our existing vehicles to go execute for the customer. So mid-single digit or better is a good place for us to start when we look at federal for 2026 but big game-changing opportunities like FAA, Southern Border, Golden Domes another ones. So some big ones ahead of us.

If you're exiting at 15%, why should we not think next year can be closer to 15% than 5% before the big stuff that we're going to talk about.

Yes, that's a great question. That's probably the question we're getting the most often. But as I mentioned, there is some timing on material deliveries, product deliveries that it's nonrecurring. And so those are the things we're just normalizing for. To your point, if we -- at our exit rate, it's really strong support for what we're expecting. When we look at 2026, we only have about 6% of revenue from recompetes. So that's a pretty low level in terms of history. Typically, you'll start off the year high single digit, low double digit on recompete revenue. And so we're already in a really good place for next year. But to start the year, where we're at is that we feel comfortable with mid-single digit or better.

And we do plan to update our guidance as we go into the next earnings call, plus we'll have better line of sight because the FAA program should be awarded as well as some of the border security work.

Okay. Let's use that as the segue to FAA. When do you expect an award? And what can you tell us about what it could mean for your financials if you were to win?

Yes. So I would say repeating what Secretary Duffy said last week at the Aviation Summit that the award is imminent. The customer is looking for Department of Transportation and FAA to picking a builder and a program manager that will manage this very important project for the country and for everybody's flying public safety. I'd say it's really important that we have a national airspace system that is safe, that is resilient, that is reliable and also that's upgraded and transformed for the future. Some of the equipment is quite old. So as we start to look at the areas, whether it's automation, telecommunications, surveillance or facilities, across the first 3 years, those will be our immediate focus and that aligns to the $12.5 billion that was in the Reconciliation Bill.

And then there will be 7 1-year options, and those are put in place to be able to do the common automation platform as well as the facilities consolidation. There is an additional $19 billion that is needed for that. So if everybody can help lobby Congress because it's important that we do have the best and the safest national airspace system in the world.

We are very excited about hopefully receiving the award. We strategically partner with IBM as our technology partner. And we also have built a team of -- I'm going to call them the who's who of the FAA companies that have the long business with the FAA, including Regulus on the surveillance front, Mosaic on the automation front, Tetra Tech on the communications front and Noblis on the acquisition front. So again, hopefully, an imminent award, and I think we've put together a very compelling offer.

Over what period of time with the $12.5 billion be spent?

So that's over the first 3 years of the contract and then the additional $19 billion would be needed over the last 7 years. And that's specifically relative to areas like upgrading the radar systems, going from copper to fiber, analog to digital, doing some of the voice communication system work. Those are the primary areas of focus. I would say from a Parsons perspective, too, we treat this as like an aviation modernization franchise. We think it's a great opportunity to work with the United States first but also then take those capabilities global. And this is a great example of why we have the portfolio we do. This was an entire company effort because when you look on the federal side of the house, we've been supporting the FAA for over 5 decades, doing a lot of facilities work.

But when you look at our Critical Infrastructure business, we've done over 450 airport projects all over the world. So we understand how airports work. We understand how the airlines work, and we understand how the FAA works. So it's truly a one Parsons effort.

Okay. Is there any simple framework for how to think about the $12.5 billion or the [ $4 billion ] a year translating to Parsons?

Yes. So we've not shared financial information. And the reason is we're still in a competition. And there's some flexibility with how each bidder approach the job, and that's dependent on how much procurement would go through your books. So what we've indicated is that we'd be happy to share financial information post contract award.

Okay. There has been some discussion of uniquely running a lot of the revenue through the prime integrator and then the prime pays the subs as opposed to the subs having their own contracts with the government. Is that -- am I correct that, that's being evaluated? And I guess where I'm going with that is, will we all need to understand what -- whether or not that's happening because it has an implication for the -- a significant implication for the margin on whatever the revenue number is going to be. I don't even worry about that because you'll just lay it out for us.

Yes. I'd say we're going to lay that out for you. I think the important thing to note is that the margins will be in line with our federal business margins.

They will.

But other than that, we don't want to get too much into the structure for competitive reasons right now.

Okay. There's not a lot of competition for this at the moment. And I've heard some people in the industry say, well, that's because, as Carey Smith just said, Parsons has a long history with aviation FAA. They've done a ton of work at airports. They just know this so well. It's not even worth competing. I've heard others say that it's a high-risk project with cost overrun potential that will have low margins and therefore, others don't want to do it. Which of those is true? Are those both -- do those both have some truth? Or what's your take on that?

Well, I like the former much better. So I would say we are well positioned. We put together a very strong team. We put together a very compelling offer. We understand the FAA but also we understand how to transform the FAA in parallel because that's equally important. You've got to make sure you keep the system operating reliably but you also have to upgrade it so that it's ready for the future. We would not sign a bad contract. This is a cost plus award fee contract. And again, the margins are in line with our current federal business.

Okay. Great.

And importantly, I think some of the other lower competition has created a conflict of interest for some of the system or product providers. So it made a lot of sense for somebody like Parsons who doesn't actually supply radars as an example or comm systems as an example. So...

I was a little surprised that as that was explained to me by some of your peers, it is a little surprising that there aren't certain subcomponents or technologies or software that you would want to provide into the process. Or can you still do?

Well, you do get into a conflict of interest. So let's take a common automation platform, which will be part of Phase 2. If you're the integrator and you're involved in the selection of who's going to be providing that, you shouldn't be the company providing that. So there are some inherent conflict of interest in that regard. But I'd say the most...

And you do not run into.

We're not bidding in areas such as those. So we're not going to be selecting our own equipment. I think the most important thing that is needed here is a company that understands system integration and a company that most importantly understands program management and building. We're the #1 program manager in the world as ranked by engineering news record.

Okay. All right. We will keep our eyes peeled. Golden Dome, how does Parsons participate in Golden Dome? And is Golden Dome definitely fully moving forward? It's been a little surprising that there hasn't been more award activity. Is a significant priority for this administration but administrations are only 4 years long. Are you feeling at all different about the likelihood this all moves forward or not?

So like FAA, I would say Golden Dome has bipartisan support. It's very important for the country to be able to protect us from all different types of attacks, whether it's counter unmanned air systems, cruise missiles, hypersonic missiles or intercontinental ballistic missiles. So there has been progress being made. General Guetlein was named as running Golden Dome, who was an excellent choice with his background in the Space Force and the Air Force. There has been $25 billion in the Reconciliation Bill for the Golden Dome. Initially, we believe a lot of the effort is going to be to buy more capabilities that are there today, consider more fabs, more Patriots, ground-based interceptors. And a lot of the effort will involve system engineering and integration.

Parsons has part of the Missile Defense Agency for 4 decades. We are the system engineering and integration contractor. So we are encouraging use of our vehicle, which is already in place. We have a $2.26 billion contract. We have over $1 billion ceiling remaining. That contract runs until January 2029. So we would like to be heavily involved in the integration effort relative to Golden Dome.

Have you seen any funded task ordering from under that vehicle yet that whether it's actually specifically for Golden Dome or if it's not named for Golden Dome right now, you suspect it is eventually for Golden Dome?

So I would say a lot of the work that we do on that contract because we're involved in everything from design development, integration test, follow-on life cycle support. We get involved in architectures, for example, in architecture development. So the Missile Defense Agency has released a classified Golden Dome architecture. So there are aspects of the work that we perform on our teams contract that are relative to the Golden Dome effort. And beyond that...

You've participated in helping create the architecture?

We've been involved in some of the support for the Missile Defense Agency architecture. And then I would say beyond that, there are some new areas that we plan to participate in. Non-kinetic effects is a great example because today, usually kinetic effects are used missile to missile to take out a missile system. We have exquisite capability in cyber and electronic warfare, where we can defeat missile systems using non-kinetic effects. And then we're also looking at partnering with a company on the battle management command and control and then participating as a partner on some of the space-based interceptor activity. But the most important role for us is to leverage what we've done for a long time, which is system engineering and integration.

Okay. In your list of growth platforms for the business, you mentioned FAA Golden Dome, you also mentioned border security and INDOPACOM. Do those buckets have specific sizable singular program award possibilities? Or are those more sort of you're involved in them and they're going to grow faster than the end market?

Yes. So I would say there are some specific program possibilities. Department of Homeland Security is looking at some potential procurements in areas of the southern wall and also in counter unmanned air systems. Importantly, from a Parsons' perspective, we've been involved in border security for over 2 decades. We support Defense Threat Reduction Agency in countries like Jordan, Armenia, Georgia, providing border security. We've also been involved in supporting Department of Energy with Counter Nuclear Smuggling Detection and Deterrence Program. That's a $1 billion program that has only 2 awardees on it. We've done work at the Southern border wall before in terms of remote video remote towers and then remote video surveillance capabilities. And we've also been involved in land ports of entry. So we feel that we bring quite a few capabilities to be able to help with the border security.

Okay. And then profitability in Federal Solutions, Matt, maybe just talk about where the FS margin can go from here. It's been a little -- it's always a little lumpy quarter-to-quarter but as I think confidential was higher margin. So as that's rolled out, that pressures the margin a little bit. But then last quarter, the margin was back up again. So where do you see that medium term?

Yes. So to your point, within the Federal business that we don't really have performance issues necessarily. It's really always a mix story. So last year, with the confidential contract playing a big role in that being a fixed price international contract that did have higher margins relative to the Fed margin. So long term, Carey and I are comfortable in kind of that high 8s, low 9s based on the mix. Right now, we're just north of 60% cost-plus work. So if you think about our cost-plus work structurally limiting the margin expansion opportunity. The good news about that is, of course, you're kind of on the front end, you're more in the research and development, the first of its kind work.

So you would never really want to shift that work to fixed price because you're kind of solving problems as they come along versus building to print necessarily. And so we feel really good about the Fed margins in high 8s, low 9s. We do have -- we talked previously, Noah about the Joint Cyber Hunt Kit program. We were notified that we were successful on that pursuit. So really big products job for us over the next 3 years. So that will benefit margins over the next couple of years.

FAA, as an example, as Carey mentioned, is cost plus award fee kind of in line with the rest of Fed margins. So it will always be a mix shift story. But I think the tailwinds on margin without a doubt expanded products opportunity. We've gone to our customers with a lot of ideas around shifting to fixed price because that's what we had heard they wanted but we haven't really had a lot of movement on that side as of yet but we're very comfortable in the fixed price world where it's pretty well defined. And so I would say a shift to fixed price and more products will benefit margins and then the cost -- additional cost-plus we kind of hold it more in the high 8s, low 9s.

And also M&A, the companies that we acquire are greater than 10% EBITDA margin on both Federal and Critical Infrastructure.

Things you buy have a higher growth rate and a higher margin, but at a lower multiple?

Yes. Pretty good story.

That's a good way to do it. There was discussion in the industry of more outcomes-based, more fixed price. You're saying you went to the customer with here's a menu for where we would do that, but they're not taking you up on it.

I would say, in general, there hasn't been a big shift there. And it really goes back to if it's something new, new, you can't fix price. If it's something that's repeatable, you can. But in general, there has -- we have not seen a big transfer from reimbursable to fixed price work. So we would be willing to do that, though, in areas that we're comfortable.

I'd say a lot of the customers enjoy the flexibility of being able to kind of shift mission along the way versus kind of committing to exactly what they want from the start.

Okay. And how would FAA be both fully cost plus but also in line with the segment average?

So FAA contracts cost plus award fee, right? You have basically task orders. They call them needs packages. Each needs package is going to be assessed differently. So you can have fixed price needs packages as well as cost plus needs packages. So if it's something that you've been doing for a long time and you can fix price it, both we and the FAA would agree that we should fix price it. But if it's something brand new, then you would leave it as a reimbursable.

So the FAA project, if you were to have it, would literally -- it would almost be like the segment. It would have the mix of the different types of...

That's correct.

Yes. But to your point, Noah, obviously, delivering is critically important for the award fee portion of the cost plus as well.

Right. Right. Okay. Let's maybe talk about the Infrastructure business a little bit. I mean, to some degree, I feel like it's diversified across a lot of projects in several geographies, and it just keeps growing 10% to 12%. And I'm just going to assume it just keeps growing 10% to 12%. Can it be as simple as that? Or are there things that accelerate that? Or are there reasons that would decelerate? Anything you're seeing that's notable right now by geography? Or is it just forging ahead across dozens of projects?

Yes. So we're really excited about the Infrastructure business. It's been hitting on all cylinders. We've had over 3 consecutive quarters greater than 10% margin. We've had 20 consecutive quarters of greater than 1.0 book-to-bill. So as we've continued to grow, we've been continuing to bring in more business. The demand is there. When you look at Parsons, we're about 81% focused in North America, 19% within the Middle East. We got within the U.S., the Infrastructure Investment and Jobs Act that was passed in November of '21. That money is not going to peak until the 2028 time frame, then you have a 6- to 8-year tail after that.

Likewise, we're seeing a similar phenomenon, and that's $1.2 trillion. Similar phenomenon in the Middle East, which they're going to spend about $1.5 trillion. That funds are not going to peak until about the 2030 to 2034 timing. So the demand is out there. It's quite substantial. We're in all the right parts of that market as well. We focus predominantly on hard infrastructure. So if you think about roads and highways, rail and transit, airports, ports, bridges, those are all the areas that we play in. We've won some of our most significant projects within the last couple of years.

Within the Middle East, we're involved in almost every major project going on. I'll hit on Saudi. That makes up about 60% of our Middle East business. So we're involved in Qiddiya, the world's largest entertainment city, King Salman Park, the world's largest park. We did the Riyadh Metro, the world's longest metro. We were just awarded a job with the Ministry of Defense, a Critical Infrastructure job. We just won a border security job with the Ministry of Interior. We were awarded the traffic management around Riyadh, probably the most important project to be ready for the 2030 and 2034 Expo.

Similarly, in the U.S., we've seen some of the biggest projects that we've seen in decades. We were awarded the New York Bay Bridge, $147 million project for us. We're on the Hawaii Rail and Transit program. We're awarded the Georgia State Route 400 Express Lanes, one of the first and largest public private partnership efforts within the United States. And also, we're the program manager for the Gateway Hudson River Tunnel. So the infrastructure business has a lot of tailwinds, a lot of funding. And then I should mention that there's also going to be a new 5-year surface transportation reauthorization bill that should be passed by November 2026 in the U.S. So you're going to have a layering effect where the IIJA is still ramping up and then the new surface transportation bill is starting.

Okay. That sounds quite robust. And the margins in that business, you mentioned have expanded. You had the legacy contract, which pertains to when you historically would do a different type of work that had a different risk profile, I guess. That's now just 100% fully out of the business?

Yes. So all the legacy business kind of wrapped up last year, we achieved substantial completion or final completion on the program execution. So that's behind us. So the great thing now, we're focused on what we do very well, which is program management and design engineering.

And so how would you categorize where that margin lands 3, 5 years down the road?

Yes. So I'm looking at last year, we were about 7% margin within CI. Year-to-date, we're at 10.3%. So 300 basis points of margin expansion from CI, which has been critical to delivering 50 basis points last year at the Parsons level and another 50 basis points this year. And so we're very happy to see CI north of 10% already. And we think within North America specifically, we feel like the Middle East business is probably operating about where it needs to be, but there's still some additional opportunity within North America. So if we can get another 20 or 30 basis points out of the North America CI business as we kind of -- to Carey's point, we're done operationally, but there's still a little bit of a drag on some of these things. So look forward to having those completely behind us.

The Middle East margins right now are higher than the North American.

Correct. Yes.

Approximately how wide is that gap?

A couple of points.

A couple of points?

Yes.

And they should be the same over time?

Could be. Yes.

Okay. Got it. Okay. We have sort of 5 to 10 minutes left. I have a few more questions, but why don't I see if there's anybody in the audience with a question for Carey and Matt. Anybody, don't be shy. I haven't had a question yet today. These lists must just be too thorough, extinguished all possibilities.

Goldman has done such a good job.

Okay. Let's talk capital deployment and acquisitions. That's a significant portion of your model as well. I guess it's been a little surprising that there may be hasn't been a little bit more activity. And I've kind of seen that across a lot of the deal platform businesses I cover, including ones in completely different end markets than your own. So I'm sort of trying to figure out if there's some common thread to that or if it's just random. But what have you seen in the deal market? Is there anything making it harder than normal right now or not? And how much do you think you can do in 2026?

Yes. So we've still been very busy. We've acquired 16 companies since 2017, including 3 this year. We bought TRS Group, which is a company that does thermal remediation and also supports our PFOS, PFAS emerging contaminant elimination in the first quarter. Followed that with Chesapeake Technology International, a company that does end-to-end cyber, electronic warfare, signals and intelligence capability, has a nice presence in the INDOPACOM region, which we could tap into some of the reconciliation funding I mentioned earlier and also a lot of work with Special Operations Command. Then most recently, we acquired Applied Sciences Consulting, a Florida-based water firm focused on water resiliency. We had a water practice in Florida. We did a lot of wastewater treatment work, but this, combined with the resiliency will enable us to tap into the billions of dollars that are going to be spent in water within Florida. So happy with 3 deals we did. We're still very active. We have a long robust list in both Federal and Critical Infrastructure. And capital deployment is going to continue to be -- M&A is going to continue to be our #1 use of capital deployment.

We like the fact that, to your earlier point that we don't pay high multiples. We've been between 9 to 13x for all the companies that we've bought. We also buy companies generally on a preemptive basis. We try and avoid auctions, and we don't include revenue or cost synergies in the companies we buy. And I think we have a unique approach. When we buy a company, our objective is to keep the founders and the leaders that made that company successful. And today, 1/3 of my leadership team formally came from M&A.

Is -- are your thresholds specifically 10% organic revenue growth and a 10% EBITDA margin?

That's correct.

That could be higher than that.

That's correct.

Okay. And then doing that in the 9 to 13x EBITDA range?

Yes. Correct.

Okay. And there's plenty to do in that fit all of that?

We've done 3 already. I was hoping to close the fourth this year but stay tuned.

I think specifically, Noah, when you think about the work that we're able to do and you think about some of these founders on the federal side, specifically that are so mission-oriented, we've been really -- when you start to bring them the capacity, whether it's on the HR side, the classified space, the IDIQ vehicles that we have, they feel like they can make a bigger impact on the long-term mission. And that's really been what we've been focused on when we're selling them on why Parsons is we can do more together. And so we'll work with them for a little while, go through a little bit of a grooming phase, make sure that the cultures fit together. And so typically, by the time we get to negotiations, it's -- we both know it's the right thing.

So you can find technologies, capabilities, solutions that have a high growth rate and a decent margin but do even better on your platform because of all that infrastructure and then they want to sell to you. So it doesn't happen.

Yes. I think a perfect example of that was a win that we had with the General Services Administration a couple of years ago, $1.2 billion job. And we brought all of our federal capabilities together. Nobody could have won that job, including Parsons on their own but together as a collective company, we won the job and we also beat Tier 1 companies to win that job. So it really goes back to we've built an exquisite federal capability that spans end-to-end cyber, electronic warfare, signals intelligence and then selective areas within space and missile defense.

Excellent. And how large are PFAS and water as a percentage of total revenue today? And could those be significant growth drivers or they'll just never be large enough relative to the rest of the business?

So the water is part of our water and environment, which makes up 15% at the Parsons level.

Of total company?

It's within that group. So it includes water and includes some of our mine reclamation jobs and environment but it's 15% of the total company revenue. Water is our fastest-growing and most profitable part of our Critical Infrastructure business, which is why we are very focused on it. PFOS, PFAS represents a component of our water business. Within PFOS, PFAS, we see that as a $220 billion total market, $40 billion of which is addressable for Parsons. We think that market is going to peak in around the 2032 time frame. We're uniquely positioned there. We've had a research and development water facility up in Syracuse, New York for over 3 decades. We've come up with a patent that we're quite excited about. It's called the Hot ISCO patent that was approved 2 years ago in Canada that was approved this year within the United States.

It's first patent of its kind to actually destroy the PFAS molecule on site without having to require incineration. And it can be applied to water, groundwater, soil type of problems. We've already deployed that technology now 3 times. So we feel that we're in a great position for PFOS, PFAS. We handle everything from investigations to the actual remediation and treatment to all the follow-on life cycle and support. So it's the entire life cycle chain of how you eliminate PFOS, PFAS.

Okay. Well, excellent. All right. We're out of time. So we'll wrap up there. So Carey and Matt, thanks so much for being with us today. This is great.

Thank you very much, Noah. Appreciate it.

Thanks, Noah.

Good day, everyone, and welcome to the Third Quarter 2025 Parsons Corporation Earnings Conference Call. [Operator Instructions]

Note, this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Dave Spille. Please proceed. .

Thank you, Carmen. Good morning, and thank you for joining us today to discuss our third quarter 2025 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results as well as a review of our 2025 guidance. We then will close with a question-and-answer session.

Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year end December 31, 2024, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements.

Management will also make reference to non-GAAP financial measures during this call, and we remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now I'll turn the call over to Carey.

Thank you, Dave. Good morning. Welcome to Parsons Third Quarter 2025 Earnings Call. This quarter, we continued to deliver strong performance in a dynamic global environment as an advanced and differentiated technology leader that's aligned to the administration's and global priorities in national security and infrastructure our portfolio is strategically positioned to continue to capitalize on long-term macro environment trends.

In addition, we operate with speed in delivering operationally relevant solutions at a time where our customers need companies that can deliver rapid results. During the quarter, we continued to achieve industry-leading organic revenue growth, excluding our confidential contract, significantly expanded our adjusted EBITDA margins, exceeded our cash flow expectations and won strategic contracts.

In addition, our win rates and hiring retention remained strong and we completed another accretive acquisition after the quarter ended in the fast-growing and profitable water market that strengthens our capabilities and enhances our Florida presence.

Turning to our third quarter financial results. Our adjusted EBITDA, adjusted EBITDA margin, cash flow results exceeded our expectations, and our total and organic revenue growth rates, excluding the impact from our confidential contract remained strong at 14% and 9%, respectively. This includes 18% total revenue growth in critical infrastructure and 9% in Federal Solutions. This strong growth in both segments highlights the strength and synergies of our diversified portfolio, our strong hiring and retention, the successful integration of our acquisitions and our alignment to priority spending areas.

During the third quarter, we also delivered 60 basis points of margin expansion to 9.8%. And $163 million of cash flow from operations and reported a book-to-bill ratio of 1.0x for the quarter and trailing 12 months. This continues our streak of having a quarterly trailing 12-month book-to-bill ratio of 1.0x or better since our 2019 IPO.

Finally, we are reiterating our 2025 adjusted EBITDA and cash flow guidance ranges at the midpoint and we're modifying our revenue outlook to reflect delays in sole-source task order awards products and material procurements. In addition to delivering solid financial results, we won 4 contracts over $100 million in the third quarter with 2 representing new work.

Significant third quarter contract wins included a new large 10-year single-award task order contract is an exclusive subcontractor for design and modernization on the Holston Army ammunition plant government-owned contractor operated contract. We booked $50 million on this contract during the quarter. This win continues our success of winning industrial-based upgrades as per the $18 billion modernization plan and is our fourth contract win supporting the RMA customer that's valued at more than $100 million.

A 6-year $133 million authorization to continue serving as the lead designer for the Georgia State Route 400 Express lines. This project will add new Express Lanes and use state of-the-art traffic, incident management and digital twin systems. As a Tier 1 focused state for persons, this expands our Georgia Department of Transportation presence with the state of Georgia expected to spend more than $20 billion over the next 5 years. We were awarded 2 new multiyear single-award defense and security contracts by Middle East government customers. One contract valued at more than $100 million represents new work, we believe the design review and project and construction management of National security infrastructure. While the second contract is the design border security, infrastructure and facilities.

These contracts reflect the strength of Parsons synergistic portfolio and our ability to bring comprehensive national security critical infrastructure protection and program management capabilities to our Middle East and critical structure customers. And during this quarter, we booked $107 million for these 2 contracts, delivery partners, a joint venture of 3 companies, including Parsons is the managing partner was awarded of $665 million, 4.5-year contract extension by the Gateway Development Commission to continue managing the successful delivery of the Hudson Tunnel project.

This project will build a new 22 Brio tunnel under the Hudson River and rehabilitate the existing 115-year tunnel as well as 9 miles of new passenger rail track between New York and New Jersey. We were awarded an $88 million task order under the Air based defense contract Parsons will provide integration, upgrades procurement and training across the Europe and Africa areas of responsibility for the United States Air Force. This contract includes a 1-year base period and 2 1-year option periods, and we booked $82 million during the quarter.

For the first 9 months of 2025, we've been awarded over $190 million in task orders on this IDIQ vehicle. Air based air defense is increasingly important around the globe to safeguard military operations and Parsons is an industry leader in this domain with innovative solutions designed to rapidly detect alerts, deny or to defeat threats, ranging from low-cost demand vehicles sophisticated hypersonic weapons.

Parsons was also awarded 3 PFAS contracts with a collective value of $23 million. These wins span both our Federal Solutions and Critical infrastructure businesses and expand our portfolio in the highly strategic and rapidly growing PFAS market. Year-to-date, we've won nearly $70 million in PFAS contract awards, and the PFAS market represents a $40 billion addressable market for Parsons. These wins represent revenue synergies with our TRS Group acquisition.

In addition to these large and important wins, we continued our successful track record of acquiring strategic companies in high-growth markets that strengthen our portfolio and have revenue growth and adjusted EBT margins of 10% or more. After the third quarter ended, we acquired Applied Sciences Consulting, a Florida-based engineering firm that specializes in water and store motor solutions for cities, counties and water management districts across the state.

Water is our fastest-growing and most profitable market within our North America infrastructure business unit. This acquisition positions us to capitalize on Florida's significant investments in water infrastructure, resiliency and quality. We continue to deploy capital across both business segments to take advantage of the significant tailwinds in our markets and 4 of our last 6 acquisitions have been in our Critical Infrastructure segment.

During the quarter, the company was recognized as 1 of the world's best companies by Time and 1 of the best led companies by Glassdoor, we're particularly pleased with the Glassdoor rating since we were selected by our employees.

Parsons also received the prestigious Diamond Award in the Structural Systems category from ACEC New York for our work on the Brooklyn Bridge rehabilitation project. Looking forward, we are excited about our growth opportunities. Our relentless focus on strong program execution and our delivery reputation provides customers with the confidence they need to choose Parsons as their contractor of choice for their large, most complex and mission-critical challenges.

In addition, our unique and synergistic critical infrastructure and Federal Solutions portfolio which consists of 6 growing, profitable and enduring end markets is expected to drive mid-single digit or better organic revenue growth, excluding the confidential contract for the foreseeable future. This growth outlook excludes the FAA brand-new air traffic control system contract.

Regarding this opportunity, we believe a decision is imminent, and we felt we offered a compelling bid given we're the #1 program manager in the world offered a transformational approach strategically partnered with IBM, have strong past performance and assembled a team that is vendor-agnostic and understands the FAA.

In Critical Infrastructure, we continue to win some of the largest and highest priority projects in our geographies and are expanding into high-value adjacent markets by leveraging our entire portfolio with long-term tailwinds and 20 consecutive quarters of greater than 10x book-to-bill, we expect continued growth into the next decade. In the United States, our focus on hard infrastructure such as roads and highways, bridges, airports and rail and transit is aligned to spending priorities.

The infrastructure investment and Jobs Act provided states with the confidence they needed to move forward with major infrastructure projects and discussions on the next surface transportation bill are underway. This bill is expected to provide additional budget for increased U.S. infrastructure spending.

Our Middle East infrastructure business also continues to excel. Our more than 60-year history in the region, outstanding reputation and Saudi joint venture has positioned us as a trusted partner to our customers and is a competitive advantage in the region.

We see significant demand for our engineering and program management solutions across the region as governments implement their strategic visions and prepare for upcoming world events. In addition, our expansion into the defense, security, hospitality and industrial manufacturing sectors has contributed to our recent growth as these markets are receiving major investments.

In Federal Solutions, Parsons has a strong position and differentiated capabilities in aviation modernization, integrated air and missile defense, space superiority, counter unmanned air systems, cyber operations, electronic warfare, industrial-based modernization and border security with a strong alignment, the administration's priorities and budget Parsons is well positioned to immediately capitalize on opportunities in these areas.

In summary, I am very pleased with our strong execution. We continue to deliver industry-leading growth with 14% total revenue growth and 9% organic growth, excluding our confidential contract. We expanded margins by 60 basis points, exceeded our cash flow expectations. On defense contracts in the administration's priority areas, our Critical Infrastructure segment continues to hit on all cylinders by delivering double-digit organic revenue growth and adjusted EBITDA margins.

Our win rates and hiring and retention remains strong, and we continue to leverage our balance sheet for strategic accretive acquisitions. We also have a total backlog of nearly $9 million, of which 72% is funded, approximately $11 billion of contract wins that we have not yet booked a $58 billion pipeline that includes more than 115 opportunities of contracts worth $100 million or more and 15 opportunities worth $500 million or more.

We believe our healthy forward-looking metrics, strong operating teams and industry tailwinds positions us to outpace industry growth rates and continue to deliver significant long-term shareholder value.

With that, I'll turn the call over to Matt to provide more details on our third quarter financial results. Matt?

Thank you, Carey. Q3 financials were highlighted by strong revenue growth, adjusted EBITDA margins and free cash flow ahead of expectations. In addition, we continue to leverage our balance sheet and completed our third accretive acquisition of the year in the strategic water market.

Turning to the details of our third quarter results. Excluding our confidential contract, total revenue grew by 14% and 9% on an organic basis. These increases were driven by double-digit growth in our critical infrastructure protection, transportation and urban development markets. Total revenue, including the confidential contract decreased 10% from the prior year period and was down 14% on an organic basis.

SG&A expenses for the third quarter increased 6% from the prior year period. This increase was primarily driven by the inclusion of recent acquisitions and focused investments in bid and proposal activity and critical hires in support of our large strategic pursuits and pipeline aligned to the administration's priorities.

Adjusted EBITDA margin expanded 60 basis points to 9.8%, driven by improved program performance and accretive acquisitions. Adjusted EBITDA of $158 million decreased 5% from the prior year period, driven by the revenue decline on our confidential contract.

I'll turn now to our operating segments, starting first with Critical Infrastructure, where third quarter revenue increased by $129 million or 18% from the third quarter of 2024. This increase was driven by organic growth of 13% and inorganic revenue contributions from our BCC and TRS acquisitions.

Organic growth was driven primarily by the ramp-up of recent contract wins and growth on existing contracts in both North America and the Middle East. Critical Infrastructure adjusted EBITDA increased 83% from the third quarter of 2024, and adjusted EBITDA margin increased 360 basis points to 10.3%. These increases were driven primarily by improved program performance, the ramp up of recent awards and our accretive BCC acquisition.

Moving to our Federal Solutions segment, our third quarter revenue increased 9% and 5% on an organic basis, excluding our confidential contract. These increases were driven by growth in our critical infrastructure protection, transportation and space and missile defense markets.

Total Federal Solutions revenue, including our confidential contract, decreased 29% from the prior year period and 31% on an organic basis. Federal Solutions adjusted EBITDA decreased 40% from the third quarter of 2024 with an adjusted EBITDA margin of 9.2%. The adjusted EBITDA was primarily impacted by lower volume on the fixed-price confidential contract.

Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3 2025 was 62 days, an 11-day increase from the prior year period but still favorable to historical averages. This increase was primarily driven by lower volume on our confidential contract and the timing of collections in the Middle East. During the third quarter of 2025, we generated $163 million of operating cash flow, which was better than expected and drove free cash flow conversion of 135% for the quarter.

Capital expenditures totaled $13 million in the third quarter, relatively consistent with the prior year period. For fiscal year 2025, CapEx is expected to remain in line with our planned spend of approximately 1% of annual revenue.

Our balance sheet remains strong, and we ended the third quarter with a net debt leverage ratio of 1.4x. During the quarter, the remaining $85 million balance on the 2025 convertible senior notes was settled with cash on hand. Additionally, we repurchased approximately 323,000 shares in Q3 at an average price of $77.36 for an aggregate purchase price of $25 million. On a year-to-date basis, we have repurchased approximately 966,000 shares at an average price of $67.28 for an aggregate purchase price of $65 million.

Turning next to bookings. For the third quarter, we reported contract awards of $1.6 billion, representing a book-to-bill ratio of 1.0x on an enterprise basis. which continued our streak with a trailing 12-month book-to-bill of 1.0x or greater in every quarter since our IPO. In Critical Infrastructure, we achieved a book-to-bill ratio of 1.1x which is the 20th consecutive quarter with a book-to-bill ratio of 1.0 or greater.

In Federal Solutions, we reported a book-to-bill ratio of 0.8x. Our backlog at the end of the third quarter totaled $8.8 billion, a 1% increase over Q3 2024. Additionally, our funded backlog is the highest since our IPO at $6.4 billion, a 10% increase year-over-year.

In terms of our guidance, we are reiterating the midpoint of adjusted EBITDA and operating cash flow. However, we are updating revenue guidance to reflect the impact of federal customer capacity constraints impacting timing of sole-source task order awards, products and material procurements, and the inability to recover in Q4 due to the extended government shutdown. We expect total revenue to be between $6.4 billion and $6.5 billion.

This guidance represents total revenue growth of 14% and 10% on an organic basis, excluding the confidential contract. Including this contract, total revenue is anticipated to decline 4% at the midpoint of the range and 8% on an organic basis. Adjusted EBITDA remains between $600 million and $630 million.

At the midpoint of our revenue and adjusted EBITDA guidance ranges, our margin increased to 9.5% from 9.3%, this represents adjusted EBITDA margin expansion of 50 basis points from 2024 and a 100% -- 100 basis point increase since 2023. Operating cash flow is expected to be between $380 million and $460 million.

While the midpoint remains the same, we did want to widen the range to incorporate any potential impacts from the extended government shutdown. Other key assumptions in connection with our 2025 guidance are outlined on Slide 11 in today's PowerPoint presentation located on our Investor Relations website. With that, I'll turn the call back over to Carey.

During the third quarter, we delivered double-digit revenue growth, excluding our confidential contract, 60 basis points of margin expansion, free cash flow conversion of 135% and we completed a strategic acquisition while maintaining our strong balance sheet, which will enable us to make future accretive acquisitions. We remain optimistic about our future, given our team's proven execution, the tailwinds we have in both segments, our strong total and funded backlog and the robust pipeline of large opportunities we have to pursue. .

With that, we'll now open the line for questions.

[Operator Instructions]

Our first question comes from Sangita Jain with KeyBanc Capital Markets.

So Carey, and Matt, just -- it looks like there was some revenue from the confidential contract in 3Q. I know it was a much smaller number than the previous run rate. So I was kind of wondering if -- there was some included in your 4Q guide as well or if you're still presuming that it's going to be 0.

Yes, there was some revenue included in our third quarter guidance. At this point, it's very small and immaterial. The program is in a wind-down state, so we're basically demobilizing.

Got it. And on C&I margins, it's three quarters in a row now that you've done 10%-plus margins. I know you were expecting a softer second half as you close out some legacy projects. So kind of I just want to get some more color on what may have driven the 3Q strength and if we should expect a 10% to 10.5% as the new run rate heading into '26.

Yes, I'll start, and Matt will jump in. But I would say, first and foremost, critical infrastructure has outstanding program execution. We'd always indicated that we expected this business to be double-digit margins, and we weren't sure how quickly we could get there. And obviously, we've had 3 consecutive quarters to your point. So I would say continuing that solid execution looking forward. We've got some higher-margin business that will be coming in as we have been winning some new bids based on the demand that's out there, both in North America as well as the Middle East and then any acquisitions that we do are going to be accretive as well. .

Yes, to give some numbers on a year-to-date basis, to your point, CI is at 10.4%. So really great performance out of the CI business. Q4, we have modeled in kind of the high 9s, low 10s for a total year in kind of the low 10s, as I mentioned, but again, curious point really strong margins out of the CI business, north of 10% throughout the year. And so really excited about the stability throughout the calendar year. .

Our next question is from Andrew Wittmann with Baird. .

I wanted to ask about the top line here in the quarter and in the fourth quarter guidance. I think maybe it was a little bit lighter than you expected in the third quarter. I was wondering if you could Carey talk about what was the variance there? And then just as it relates to the fourth quarter guidance, I heard your comments in the prepared remarks, you talked about federal customer capacity, some things about the material. I just thought maybe you could elaborate on some of that.

When you talk about like materials procurement, was that like you couldn't procure because the government was shutdown? Or was there something else behind that? when you talked about customer -- federal customer capacity, is that again shutdown related? Or is there something else behind it? I think just understanding kind of what's changing or what you're seeing in the top line performance is an important topic for today.

Yes. Thanks, Andrew. I appreciate the question. So first, our challenge in this quarter was strictly due to timing. So we've had things move to the right. These were actually on contracts that were already awarded to us. Most of the work was our airbase air defense contract had a task order that was awarded later than anticipated. And then we're still awaiting on some of our defensive cyber threat hunt kit awards, and that is impacted by the shutdown.

We indicated in Q2 that we did -- we knew we had a second half that was going to be higher than the first half. And that we were optimistic that things will get moving. But I would say, unfortunately, we are still seeing delays and so we wanted to make sure that we were going to achieve our guidance. And so setting for the rest of the year, we had to assume that the shutdown may last as long as till the end of the year.

Yes. And Andy, I'd just add, if I look at Fed and I'll talk excluding the confidential contract, call it, 9-ish percent growth for Q3, we are forecasting about 15% for Q4 to Carey's point, some was a slide to the right from Q3 to Q4. We do expect acceleration in Q4, just with the government shutdown, the timing on task order awards, approvals on material purchases, things like that. All those things are kind of impacting our ability to recover before the end of the calendar year, but should be obviously first half next year. .

Got it. Okay. Great. And then I guess from my follow-up, I wanted to just drill in and get a little bit more for you on FAA. Obviously, the government has shutdown. This one1 notionally had an October 31 award target date. Obviously, the government controls that and can slide. But I was just wondering, you said imminence on the call. Like are the contracting personnel at the FAA on staff? Is there a dialogue happening there? What can you tell us a little bit more detail on that one in particular? .

Yes. Fortunately, the FAA brand-new air traffic control system is not impacted by the shutdown and an award is imminent. This program, again, is going to use the $12.5 billion of funding that was awarded under the reconciliation bill, this is a critically important program to our country.

We need to improve the safety, reliability, redundancy and efficiency of the national aerospace system. And in parallel, we have to transform that for the future. I feel that our team has offered a very compelling offer. Parsons, again, as the #1 program manager ranked by engineering news record. This is the type of work we do for a living. We partnered with IBM as our strategic technology partner, and both we and IBM have very deep engineering expertise.

We also have the right team and a team that knows the FAA and has excellent past performance with the FAA. I mean, our motto has been right team, right time. We're ready now. We certainly look forward to partnering with the FAA on the brand new air traffic control system and achieving the results by December 2028.

Got it. So just as an addendum to that, then, I think in the past, you've talked about like the dollar amount of awards that you're awaiting notice on. I think in the quarter, this one, among others, many others, went in as awards that you're awaiting notice on. What does that metric stand out here at the end of the third quarter? .

Yes. So awaiting noticeable award right now is just under $10 million, Andy and that compares to prior years of an average between 4 and 6. So obviously, a big part of that is FAA, but all in all, just under $10 billion awaiting no more. So bids submitted waiting adjudication. .

Yes, I'd also highlight the strength of our pipeline. $58 billion is a record pipeline for the company. And the number of awards that we have potentially greater than $500 million being over 15 is also a record for the company. So we're really seeing a lot of needs and demand for our business across both segments. .

Our next question is from Tobey Sommer with Truist. .

Given the slightly lower top line exiting the year, I'm just wondering how we should think about modeling next year based on the midpoint of the new top line guidance, it looks like consensus is around 8%. And total revenue growth, which I know wouldn't necessarily be an organic number, but any color you could provide there without specific guidance, of course, at this stage would be helpful. .

Yes. Obviously, we'll provide full year 2026 guidance during the February call. But to your point, solid run rate in Q4 positions us well for 2026. And we've said previously mid-single digit or better organic growth, excluding the confidential contract. So that's the number that we're holding to. That would exclude any what I'll call binary large items, like FAA or others that Cary mentioned, Southern border or Golden Dome that are obviously large items. So mid-single digit or better organic excluding confidential contract and supported by a solid Q4 revenue.

And Matt, what would the total contribution this year be from confidential contracts so we have that math equation squared away? .

Yes. It's about $350 million, so just 5-ish percent. .

And Carey, you highlighted water as an area with the recent acquisition of critical infrastructure, you talked about the growth, et cetera. Are there any verticals within critical infrastructure that you would like to sort of further fortify or maybe gain exposure where you might not have it currently?

Well, I would say water and environment, which is 1 of our 6 end markets has been rapidly growing. We expect this year for that market to be around $650 million. And I mentioned the water portion of that is also our most profitable. So we have been kind of doubling down there. The acquisition of Applied Sciences Consulting was critical for us because Florida is spending billions of dollars and making sure that they have resiliency. And this company is very well positioned to help us capitalize on it by combining our collective capabilities. So it has been an area of focus for M&A. .

Okay. And then during the shutdown, there's been kind of a new wrinkle with the administration helping funding of various things in states. Have you seen any impact from this particular facet of the shutdown. And in particular, maybe a comment on Gateway would be interesting. We have our offices nearby and it looks like there's plenty of equipment and workers still plugging away, but would love your perspective. .

Yes. And you're absolutely right there, Toby. So the gateway program continues, as I mentioned on the call, we were awarded $665 million follow-on effort for that. We have 5 major construction projects that are underway on the Gateway program as we speak and the state funding that's available for Gateway is $5 billion. So we continue to work. .

Our next question is from Gautam Khanna with TD Cowen.

Yes. I was wondering if you could comment on the EBITDA contribution from the confidential contract in Q3 and for the year, just so we have a sense for what the comp to overcome is in '26? .

Yes. Round numbers, when you think about this as a fixed price international contract, so it would be accretive to our Fed business, I think kind of low double-digit margin. .

Okay. And then I know on the FA modernization opportunity, there was -- it sounded like there were just 2 bidders yourselves and Peraton there's some anecdotes that there might be some risks associated with the terms of the contract. I just wanted to get your view on how to kind of insulate the company from some risk? And how you may gone about that bid in a way that doesn't -- is a good thing if you win it as opposed to something we should be concerned about? .

Yes. First, as a company, we will not take that business and FAA brand-new air traffic control system is not a bad contract. It's a good contract. There are only 2 bidders. There were various reasons for that. I think we got off the dime very quickly announced our partnership with IBM back in June. .

We tend to be a very agile company that delivers operationally relevant solutions. And so we kind of got out pretty fast. And I think some of the competitors were worried about that. Other competitors dropped out due to potential organizational conflicts some interest because if you want to provide systems, it's kind of hard to sit in an integrator role, you may be selecting and evaluating and acquiring those systems. So we're very excited about the FAA contract. It's going to be a good contract, and we look forward to an imminent announcement.

Our next question comes from the line of Mariana Perez Mora with Bank of America.

You highlighted space and missile defense as a growth driver for FS. I was wondering if you could talk a little bit more about that, what can you expect.

Yes, you're breaking up a lot, but I think I caught the gist of it. So space of missile defense being a growth driver. First, I would start with our missile defense contract. We are the system engineer and integration contractor for the Missile Defense Agency on the team's contract. That work will lead into Golden Dome efforts, and we are starting to ramp up in anticipation that we expect some of the Golden Dome funds there was $25 billion in the reconciliation bill to start hitting around the December time frame, and we've been closely working with the metal Defense Agency on areas like architecture. .

Relative to our space business, we're involved in space situational awareness, an area that's seen uptick as there's been a lot more activity going on in space, we're also involved in the space ground systems. We've delivered over 170 different ground systems for a variety of customers. And then an area of space we're particularly excited about would be our assured position navigation and timing solution.

We've partnered with Globalstar. We're using their constellation and our software-defined radio capability to be able to get location information in the case of GPS as Jam. A great example is we just deployed it over in the Ukraine and European theater and our timing results and location results were better than anticipated and additional units have now been purchased for the Endopacom region. So exciting business. We have seen growth there, and that's an area that we project to continue to be strong, particularly as it relates to the Golden dome program. .

[Operator Instructions]

Our next question is from Sheila Kahyaoglu with Jefferies. .

Maybe if we could talk about 2 questions. First on FS growth. How do we think about the FS growth given the order decline in the quarter? How much of it was attributable to the shutdown? And I know -- I think, Matt, you said mid-single-digit growth outlook for' '26, how we could think about the order flow and the pipeline selling together to get that growth outlook? .

Yes. I'll start. Matt, I'll jump in. So on the growth, how much tribute the shuts a little hard to tell because we're -- I think we're dealing with 2 things at 1 time. One is federal contracting capacity. There's been some delays in getting things signed off. And the second is the shutdown, which I would say the big impact there that we saw was kind of eliminating our recovery in the fourth quarter not knowing how long the shutdown is going to continue.

So we plan for it to continue for the rest of the year. But the big issue for us has been material procurements on existing contract awards. I want to reiterate this is not new business we'd go in. It's not about any program losses. It's strictly a timing issue. .

Yes. And the only thing I'd add, Sheila, if I look at total year 2025 Fed, excluding component contracts, the outlook is high single-digit growth, 11% total growth. So it's a -- the business is performing quite well. If we can kind of maintain that run rate, it's kind of above market and taking share. So we're happy with those kind of rates. .

Got it. And then maybe if I could ask one on CI, please. The performance there has been pretty good. Margins are now hitting this 10% stride, what's driving that? How do we think about mix going forward? .

Yes. CI definitely has had an excellent year, I'd say on all fronts, winning new business for the last 20 quarters, also the strong margins throughout the year. And were this quarter to be able to do 18% total and 13% organic is excellent. We're seeing strong growth in both North America and the Middle East, and that growth is going to continue for as long as we can see.

The IIJ, again, funding has not peaked yet. It won't peak until the 2028 time frame. It's going to have a 6- to 8-year tail after that. The next surface transportation 5-year bill is expected to be passed by November of 2026. So that's going to be additive to what we're seeing.

In the Middle East, our expansion there continues. We've had 4 years of double-digit growth in the Middle East. We've not just been growing in our core market of urban development, transportation, but we've now moved into 3 new markets, which are receiving significant investments, defense, security and tourism and hospitality.

So critical infrastructure, we've got great long-term tailwinds. We've been able to capitalize on it with very strong win rates, both in North America and in the Middle East. When you look at split between the businesses, though, I would have to say the real large jobs are in the federal business as you look to the near future. We talked about the $12.5 billion that the FAA is receiving for the reconciliation as we await that imminent award. There's $25 billion for Golden dome. We're well positioned, not just an area I mentioned earlier for system engineering and integration, but we also have nonkinetic effects capability and command and control capacity. There's $25 billion for Pacific deterrent -- or I'm sorry, $25 billion for more for border security, $161 billion in total, but a lot of that's addressable to us.

We do border security all over the world. So we've got currently 2 very large opportunities that are in bid within the border security area. And then Pacific Deterrence got an additional $12 billion in new funding and we're well positioned there with our presence on Quad and Guam, and that we're able to capitalize on that from the Federal group.

So CI rapidly growing, I'd say the big game changer opportunities largely in federal. I should mention 1 that kind of passes both groups too, which would be rebuilt. We expect to be involved in Syria, first in eliminating the chemical weapons and then the rebuild of Syria, which is being very much supported by the Gulf countries.

We're looking at the rebuild of Ukraine and also the rebuild of Israel Gaza. And then a final area just to hit that I put in that game changer category is our position and critical minerals and leveraging our processing and refining abilities as we start to ensure critical minerals in the United States.

Our next question is from Louie DiPalma with William Blair.

Following up on your recent answer, it seems you've made significant progress with providing defense services to some of your Middle East customers, what types of solutions are gaining traction on the defense side? And what's the long-term outlook there? .

Yes. So I'd say the areas that we've gotten into are kind of a combination leveraging our entire portfolio. So we're basically doing work for the Ministry of Defense that is infrastructure work due to the proprietary nature of it, I can't go beyond that. But if you think about infrastructure builds for the Ministry of Defense.

Also on the security side, we're doing border security work. We've been involved in border security for a long time through our work with Defense Threat Reduction Agency Armenia, Lebanon, Georgia, other locations.

We do work with customs and border protection down on the southern border, we've been involved a little bit with immigration and customs enforcement, and we do the counter nuclear smuggling detection and deterrence program for Department of Energy. So we've been able to take those competencies now and expand them, and we were awarded a job through the Ministry of Interior for border security in Saudi Arabia.

Excellent, Carey. And in addition to the FAA brand-new air traffic control systems contract that you're pursuing, you already have an existing FAA facilities contract and should that contract also benefit from the reconciliation bill funding? And related to this, are you starting to already receive awards in October? Or did you receive awards in October that were funded from the reconciliation bill funding? Is that funding starting to flow .

Yes. So I would say, to your first question, that contract will also benefit. That contract's technical support services contract. We've supported the FAA for 50 years as a company. We've been on that contract for 24 years excellent past performance, and it will benefit from the brand air traffic control system separate from our integrator work that we're looking forward to receiving. As far as reconciliation funding, I would say it's going to start to flow, we think this month and next.

And Louie, just the numbers on your question around FAA. As we've mentioned previously, that is a growth driver for us. I mentioned transportation is a key driver. We're expecting that FAA contract to grow 25% to 30% this year in 2025. So to your point, that's a great growth driver for us with or without. .

Our next question comes from Jonathan Siegmann with Stifel. .

Maybe just back on the shutdown, you've made some really helpful comments on that. But maybe if you could talk a little bit about the other side, when the government is open, can we expect a surge of activity? Or is the backlog so great at this point that we might still be talking about capacity problems next year assuming the government opens in the next couple of weeks. .

Yes, thanks. And 1 thing I should mention is 50% of our business, again, is not impacted by the shutdown because 50% of our business is not federal government-related work. I would say as far as when the government's open, I do expect that we're going to see a surge because they are backlogged with contracting actions. .

And so as I mentioned earlier, John, as I think about almost $10 billion of awaiting noticeable typically in the Middle East, processes quickly. So the majority of that is within the Federal group, that being 40% or 50% above the norm is evidence that there's a building backlog and hopefully, they'll transact quickly so that we can get working on these jobs. .

Dave, they almost have to when you look at the reconciliation funds and the fact that the government would like to spend those upfront over the next few years. So to be able to accomplish things if you look at the branded are control system, as an example, we need to achieve those milestones by December 2028 with no excuses.

We've got to deliver. And when you look at the -- a lot of the other funding that's in that build, there's a lot of milestones that have to be achieved. So I think things are going to have to get moving forward.

And as we think about next year, you've already quantified the headwind from the confidential contract. Is there anything else that you'd highlight today that we should be thinking about maybe a larger recompetes in the classified area that we should be contemplating as we think about next year? .

No. Fortunately, going into next year, a repeat rate is about 6% to 7%, so it's pretty small and there are no major contracts that are in that rate feet. We secured our contracts that are greater than $2 billion in July of 2021 is when the last 1 was one. So those have been secured for the next 7 to 20 years, respectively. That would be the 2 mine jobs, the FAA TSSE job in the Missile Defense Agency, system engineering and integration job. So our big repeats are still a ways out like 2029 time frame. .

And our next question is from Noah Poponak with Goldman Sachs.

Matt, can you just level set me or remind me the numbers on Federal Solutions organic growth, excluding confidential. What was it in the first half? What was it in 3Q? And what do you now have for 4Q?

Yes. So first half, we're looking at the total is just about 10%. Second half, we're looking at 12%, driven by Q4 at almost 15%. Saw a little bit of a ramp in Q4, but something as I mentioned, a lot of the things that slipped from Q3 are on track for Q4. So that's really what's driving the Q3 to Q4 sequential. .

Okay. Yes, I guess, how did you think about building that? I mean it's 1 quarter, but just given how that's progressed? how did you think about building that acceleration in 4Q versus 3Q or first 9 months in a government shutdown.

Yes. Obviously, we went through -- we don't take lowering top line guide without a lot of effort going into exactly what the outlook is. So we went through line by line, every program material that's been ordered, timing on those deliveries products. So I would say we're highly confident in the midpoint. I would say, if we see an extended government shutdown through the end of the calendar year, as an example, Noah, I would say it would be biased towards the lower end of the guide. But I think a lot of the sort we're hearing is, over the next couple of weeks is likely to come out of the shutdown. .

Okay. And Matt or Carey, I guess, we've been in this environment with lower outlays in some of your government customer markets, but you've still had that 10% federal core. If next year, some of the things that have gummed up the system get better can that core accelerate? Or is that too optimistic just given the overall backdrop?

I would say that we have the opportunity to accelerate. I mentioned the very large programs that we have in front of us, and I feel we're well.

Just curious if I was sort of thinking of that, excluding like putting FAA side or -- maybe you have so many large opportunities that putting them aside, is not a relevant question, but excluding any 1 large program totally changing the growth rate, just thinking more about the diversified core ex-confidential?

Yes. So this year, we'll deliver for federal -- for the full year, about 8.3% organic growth, again, which is industry leading. So I would say we're in all the right markets, and I've been talking about any of the game changer programs, and we've indicated that we would deliver mid-single-digit or better, excluding the confidential contract as we go into next year. That's excluding game changer contracts. .

Okay. Can you frame for us for whoever wins FAA approximately how large it could become on an annual revenue basis and then what the margins would look like roughly?

Yes. Unfortunately, because we're in a competition and the award is eminent, I can't share financial information at this time.

Okay. Last one, Matt, just on the FS margins because you had talked about confidential was accretive to the margin. And then as that came out, the margins came down a bit, but back up sequentially here nicely in the third quarter despite that. So as we move forward, what's your latest thinking on where the FS margin lands.

Yes. So if I look at Q3 specifically, cost type represents about 60% of the federal business. So in an environment where cost type is greater than 50%. There's always going to be a little bit of pressure on the margin, so we're comfortable in kind of the high 8s, low 9s, Noah acquisitions will help with long-term expansion as we always target 10-plus percent EBITDA on our acquisitions, a shift to fixed price.

We haven't necessarily seen it as of yet. We're obviously open in a lot of cases to that. And so I think highs to low 9s is a good a good target based on the existing connects. And we do have some great opportunities. We've talked Carey mentioned in our script a little bit about the Joint Cyber Hunt kits, things like that.

We're a little bit more product, a little bit more materials that are accretive could also benefit. In Q3, we did have that benefit from the incentive fee that we talked about in Q2 and then Q4 will help from the products. So all those things add up to kind of a high, low 9s, a good number, opportunities around expanding products and acquisitions.

Ladies and gentlemen, this is all the time we have for your questions. I will pass it back to Dave Spille for final comments. .

Thanks again for joining 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.