PSN - NYSE

Good morning, and thank you for standing by. Welcome to the Third Quarter 2023 Parsons Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Dave Spille, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2023 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, and a review of our 2023 guidance. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2022, 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, and welcome to Parsons' third quarter 2023 earnings call. I'm very pleased with our team's performance and our ability to capitalize on the positive tailwinds in both our Critical Infrastructure and Federal Solutions segments. We delivered record quarterly results in total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. We also achieved over 20% organic revenue growth in both segments for the second consecutive quarter, adjusted EBITDA growth of nearly 25%, a double-digit increase in contract awards, and over $200 million in quarterly cash flow for the first time in our company's history. In addition, we closed the strategic acquisition that strengthens our defensive cyber capabilities at a time when accelerating and evolving cyber threats are driving increased customer spending. As a result of our strong performance and the Sealing Technologies acquisition, we are raising our full year revenue, adjusted EBITDA and cash flow guidance ranges. During the third quarter, we generated total revenue growth of 25% and achieved year-over-year organic revenue growth of 23%, including 24% within our Critical Infrastructure segment and 23% within our Federal Solutions segment. Our record organic revenue growth was driven by our ability to win and ramp up new contracts, drive task orders to large single-award contracts, maintain strong employee hiring and retention, and operate effectively in two well-funded and growing markets. In addition, our successful M&A program is contributing to our growth by enabling Parsons to move up the integrated solutions value chain by offering higher-end capabilities and differentiated technology solutions resulting in our ability to bid and win larger and higher-margin contracts. We continue to efficiently grow our business. For the first nine months of 2023, total revenue grew 28%, while adjusted EBITDA increased by 32%. Our ability to drive adjusted EBITDA growth faster than our strong revenue growth demonstrates our focus on margin expansion. During the third quarter, we achieved a book-to-bill ratio of 1.0 times on an enterprise basis. These results were driven by a 14% year-over-year increase in contract awards. This is now the 12th consecutive quarter in which Critical Infrastructure's book-to-bill ratio has exceeded 1.0 times. We're pleased that over 50% of our wins represent new work, illustrating our continued ability to effectively compete and move up the value chain. On a trailing 12-month basis, our enterprise book-to-bill ratio is 1.2 times. We were awarded four contracts, two in each segment that exceeded $100 million during the third quarter. We've now won 13 contracts over $100 million through the first nine months of 2023. This is the most we've ever won in a single year, and it exceeds our prior annual revenue -- or our prior annual record of 11 contracts greater than $100 million in fiscal year 2022. Significant third quarter contract wins included: $160 million contract by the intelligence community to develop hardware and software solutions that enable intelligence operations. This seven-year classified contract represents both new and repeat work with a customer that Parsons has supported for over two decades. We booked $70 million on this contract in the third quarter. A seven-year $150 million contract by the Southern Nevada Water Authority to enhance system reliability, increase water use efficiency and improve community health. This contract represents both new and re-compete scope, and we booked $47 million on this contract in the third quarter. We are proud to have supported this critical customer for the past 30 years on more than 120 major projects. A five-year contract with an estimated value of $130 million on the NASA Repairs, Operations, Maintenance and Engineering contract. As a subcontractor to a small business, Parsons will provide facilities, construction management and engineering and technical services. This contract represents both new and re-compete scope, and we plan to book approximately $30 million in the fourth quarter. Additional scope of over $100 million for development of NEOM's THE LINE, an infrastructure project in the Kingdom of Saudi Arabia. Parsons is proud to be supporting this giga project, which is a first of a kind linear smart city, driven by 100% renewable energy. Parsons is contributing on all five of Saudi Arabia's giga projects. We were also awarded two contracts in the Indo-Pacific region totaling over $70 million supporting the United States Army Corps of Engineers. We were awarded a new three-year $44 million contract to provide the design build of United States Army Housing on Kwajalein Island. We were awarded a new task order for $27 million over five years to assess munitions, explosives and material for hazardous removal and provide construction management for the United States Missile Defense Agency facilities on Guam. We booked $54 million in total under these two contracts in the third quarter. We've been awarded extensive work in INDOPACOM by leveraging our program and construction management, engineering and planning, cyber and intelligence, and space and missile defense expertise. We are proud of our sustained regional presence, and we are focused on continuing to support our United States customers in the national security needs as part of the $9.1 billion Pacific Deterrence initiative in the fiscal year '24 budget. During the third quarter, we also announced and closed on our acquisition of Sealing Technologies in a transaction valued at approximately $200 million. Sealing Tech expands Parsons' customer base across the Department of Defense and Intelligence community and further enhances our capabilities in defensive cyber operations, integrated mission solutions powered by artificial intelligence, critical infrastructure protection and secure data management. Sealing Tech's defensive cyber capabilities complement Parsons' leading offensive cyber capabilities and increase our market share in full-spectrum cyber operations, which is expected to be a leading growth area in both Parsons Federal Solutions and Critical Infrastructure segments due to evolving cyber threats. After the third quarter ended, we also acquired Texas-based full-service consulting engineering firm, I.S. Engineers, which specializes in transportation engineering, including roads and highways and program management. This acquisition is consistent with Parsons' strategy of completing accretive acquisitions of companies with revenue growth and adjusted EBITDA margins exceeding 10%, while adding critical infrastructure talent and bolstering the company's portfolio in large and growing states. Texas is poised to receive nearly $30 billion in total transportation funding from the Infrastructure Investment and Jobs Act between 2022 and 2026. We have an active M&A pipeline across both segments, and we will continue to use our strong balance sheet to complete additional accretive acquisitions that align with our strategy and drive growth and margin expansion. As part of our long-standing commitment to ESG, during the third quarter, we were recognized by the STEM Workforce Diversity magazine for the eighth consecutive year as a top national science, technology, engineering, and math employer for minorities, women and people with disabilities. We were also named to the Best of the Best 2023 Top Veteran-Friendly Companies list by the U.S. Veterans Magazine. This award recognizes companies that are recruiting and providing a rewarding work culture for veterans, transitioning service members, disabled veterans and military spouses. In addition, we were recognized by Engineering News-Record as one of the top three global companies in 2023 in four categories: Professional Services, Program Management, Construction Management and Program/Construction Management for Fee. These rankings reflect our worldwide reputation and ability to successfully win and perform infrastructure programs. We are proud to be a company of our size with such high rankings. In summary, we had another strong quarter. For the second quarter in a row, we delivered record total revenue, organic revenue growth and adjusted EBITDA. We also achieved record third quarter operating cash flow, a double-digit increase in contract awards, and maintained strong employee hiring and retention. We closed an accretive acquisition that strengthens our defensive cyber capabilities. And after the third quarter ended, we acquired an infrastructure company that strengthens our engineering expertise and expands our geographic footprint in a high-growth state. I want to thank our talented employees for their commitment to successfully delivering on our customers' critical missions. Their dedication has enabled us to achieve our operating performance success. As I look forward, I continue to be very excited about our bright future. We're in six growing and enduring markets. In Critical Infrastructure we're benefiting from unprecedented global spending, which we expect to continue for decades to come. In our Federal Solutions segment, our portfolio of cyber and intelligence, space and missile defense, and critical infrastructure protection aligns to the national defense strategy and macro environment trends. Given the breadth of our capabilities and our technical expertise, I believe we have the right portfolio and the right team to capitalize on these tailwinds. These factors, along with our Sealing Tech and I.S. Engineers acquisitions provide us the confidence to raise our full year revenue, adjusted EBITDA and cash flow guidance. With that, I'll turn the call over to Matt to discuss our third quarter financial highlights. Matt?

Thank you, Carey. As Carey indicated, our third quarter was highlighted by record results in a number of areas, including total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. Total revenue of $1.4 billion for the third quarter of 2023 increased 25% from the prior year period and was up 23% on an organic basis. Organic growth was driven by the ramp-up of recent contract wins and growth on existing contracts and inorganic revenue benefited from our Sealing Tech and IPKeys acquisitions. SG&A expenses for the third quarter were 15.6% of total revenue compared to 17.4% in the third quarter of 2022 due to a continued focus on efficient growth across the portfolio. On a year-to-date basis, SG&A was 16% compared to 18.8% in 2022. The 280 basis point improvement is an intentional focus on delivering higher margins through cost control to go with strong topline growth. Adjusted EBITDA of $128 million increased 24% from the third quarter of 2022. This increase was driven primarily by organic growth and a high-margin change order on an unconsolidated joint venture project. The 10 basis point margin decrease to 9% was driven by higher projected incentive compensation costs as a result of the company's strong operating performance and growing employee base. For the first nine months of the year, our adjusted EBITDA margins have expanded in both segments and have increased 30 basis points overall from the prior year period to 8.5%. I'll turn now to our operating segments, starting first with Federal Solutions, where third quarter revenue increased by $160 million or 26% from the third quarter of 2022. This increase was driven by organic growth of 23% and the inorganic revenue contribution from our Sealing Tech acquisition. Organic growth was driven primarily by growth on new and existing contracts, partially offset by the previously discussed wind-down of the Kwajalein Island contract. Federal Solutions adjusted EBITDA increased by $4 million or 7% from the third quarter of 2022, primarily due to growth on recent contract awards. Adjusted EBITDA margin decreased 160 basis points to 8.3% based on the timing of program milestones and completions as well as higher projected incentive compensation costs as a result of the company's strong operating performance and growing employee base. Year-to-date, Federal Solutions adjusted EBITDA margin remained strong at 9.5%, which is more in line with our long-term expectations. Moving now to our Critical Infrastructure segment. Third quarter revenue increased by $125 million or 24% from the third quarter of 2022. This increase was driven by organic growth of 24% and the inorganic revenue contribution from our IPKeys acquisition. Organic growth was driven by higher volume in both the Middle East and North America. Critical Infrastructure adjusted EBITDA increased by $21 million or 51% from the third quarter of 2022. Adjusted EBITDA margin increased 170 basis points to 9.8%. The adjusted EBITDA increases were driven by accretive organic growth and a high-margin change order on an unconsolidated joint venture project that positively impacted equity and earnings. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3 2023 was 65 days, down 3 days from the prior year period. During the third quarter of 2023, we generated $204 million of operating cash flow, compared to $123 million in Q3 of 2022. For the nine months ended, we generated $218 million of operating cash flow, a 47% increase over the prior year period. These increases were primarily driven by improved profitability and strong collections across the portfolio during the third quarter. Capital expenditures during the quarter totaled $13 million compared to $6 million in the prior year period. CapEx continues to be well controlled and remains in line with our planned spend of approximately 1% of annual revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of 1.4 times consistent with the second quarter, even after the all-cash acquisition of Sealing Tech, which closed in August. Our low leverage, strong free cash flow outlook and undrawn borrowing capacity is enabling us to continue to make internal investments and accretive acquisitions to support long-term growth. Turning to bookings for the third quarter. Year-over-year contract award activity increased 14% to $1.4 billion. The strong bookings performance was driven by a 12% increase in our Federal Solutions segment and a 17% increase in Critical Infrastructure. Our book-to-bill ratio for the third quarter was 1.0 times, with Federal Solutions at 1.0 times and Critical Infrastructure at 1.1 times. On a trailing 12-month basis, contract awards increased 47%, and our book-to-bill ratio was 1.2 times with Critical Infrastructure at 1.2 times and Federal Solutions at 1.1 times. Our backlog at the end of the third quarter totaled $8.8 billion, up $587 million or 7% from the third quarter of 2022. Now, let's turn to our guidance. We're increasing all of our 2023 guidance ranges provided on August 2 to reflect our record third quarter results, recent large contract wins, hiring and retention momentum, Sealing Tech acquisition and our outlook for the remainder of the year. For 2023, we are increasing the midpoint of our revenue guidance by $300 million to a range of $5.175 billion to $5.325 billion. This represents total revenue growth of 25% at the midpoint and 19% on an organic basis. Additionally, we are increasing our adjusted EBITDA by $25 million at the midpoint. We now expect adjusted EBITDA to be between $440 million and $460 million, which represents 28% growth at the midpoint of the range. Margin at the midpoint of our revenue and adjusted EBITDA range remains at 8.6%. We are also increasing our cash flow guidance. We now expect operating cash flow to be between $300 million and $340 million, representing 35% growth at the midpoint. This guidance also reflects $33 million of deferred cash payments made at the beginning of Q4. Free cash flow conversion is expected to remain around 100% of adjusted net income for the full year. Our updated guidance represents 6% of additional revenue and adjusted EBITDA growth at the midpoint of our ranges. Other key assumptions in connection with our 2023 guidance are outlined on Slide 10 in today's PowerPoint presentation located on our Investor Relations website. In summary, we've delivered strong results in each of the first three quarters of the year. Through the first nine months of the year, we have achieved revenue growth of 28% and adjusted EBITDA growth of 32%. We're confident in our ability to achieve our increased 2023 guidance as a result of our strong funded and total backlog, continued hiring and retention momentum, robust global infrastructure spend, and the increasing need for national security solutions. With that, I'll turn the call back over to Carey.

Thank you, Matt. I'm very pleased with the performance of our company. We delivered record quarterly total revenue, organic revenue growth, adjusted EBITDA and operating cash flow. We also continue to be a top organic revenue growth leader in both of our segments, and we're executing on our strategic M&A program, what's driving growth into our business. Given our strong operating performance, we're raising guidance for all three of our financial metrics. Our team is delivering consistent results, and we are benefiting from tailwinds in each segment. We expect our momentum to continue given our portfolio is well aligned to important macro environment trends in two well-funded segments and six growing and enduring markets. With that, we'll now open the line for questions.

Thank you. [Operator Instructions] The first question comes from Bert Subin with Stifel. Your line is open.

Hey, good morning, and congrats on the great quarter.

Thanks, Bert.

Thanks, Bert.

Carey, organic growth has been pretty unbelievable the last two quarters, both segments above the 20% mark, which is obviously quite a bit ahead of your peers. That seems pretty intact as we look to 4Q, maybe a little lower, but still really elevated. As we think about the fourth quarter, what's driving such a wide range of outcomes? I assume it's the government shutdown or the potential for a shutdown. And then as we look out to '24, what gives you confidence growth can remain elevated if maybe not at the 20% mark, but still pretty quick for what you put out at the Investor Day?

Yeah, thanks for the question, Bert. So first, we're very pleased with our growth to date and obviously, two consecutive quarters of 23% organic growth. We're in terrific markets, all six end markets are growing. As we look to the latter half of the year, we have one headwind, which is our Kwajalein program in Engineered Systems. That's about $15 million that we need to overcome. I would say the biggest variable is really kind of uncertainty relative to the budget environment. And then we do get seasonality in our business, both in Federal and in Critical Infrastructure. Our FAA program in Federal has seasonality and our mine programs up in Canada. With that said, we're confident of achieving the midpoint to the high end of the range as far as revenue performance. As we look to '24, it would be great to be able to continue this terrific organic growth performance, but we're obviously making sure that we put together measured guidance and that we can meet what we commit to deliver.

Maybe just on that point, could you give a little bit more commentary on the large cyber contract win you had? I think that's probably quite early stages, maybe more of a '24 contributor. And then what you're seeing on the IIJA front? Or if you can't break it out on IIJA, just in terms of what you're seeing in domestic infrastructure spend?

Yeah. So the large cyber win, it's a contract that we've held, but they're going to be adding some new and expanded scope. It's a classified contract and it's supporting an intelligence community customer. I can just say we've supported this customer for over two decades. We're very pleased with that. We also continued our success beyond this classified customer with the United States Cyber Command, securing both our J6 and our J9 [indiscernible]. That's critically important as we look forward to next year because Cyber Command has now been given budget authority, similar to what the United States Special Operations Command has. So, beyond the intelligence community, we're seeing excellent growth across our cyber business. Within the IIJA, there's been about $184 billion of the funds that have started to roll out from the $1.2 trillion. Our estimate is still that we're going to see the majority start to roll out in the latter part of this year, early next year. And we expect the peak to move from a 2026 timeframe to a 2027 timeframe based on the rollout. As you could see from 12 consecutive quarters of greater than 1.0 book-to-bill and we're overdriving organic growth in both the Middle East and the United States, we are starting to benefit from that. It also helps our Federal segment because our FAA contract, which we just won the re-compete, the FAA is getting $25 billion now, the infrastructure bill, $5 billion of that is going to go to facilities work, and that's directly aligned with our scope on the FAA contract.

Great. Super helpful, Carey. And then Matt, just a final question on the margin side. Can you just update us on where we stand on the two legacy Critical Infrastructure projects? Those are still expected -- one is still expected to wrap before year-end and the other by the end of next year. And then, what are you seeing in terms of margins and backlog as you go forward just with some -- a lot of the pretty unprecedented demand that Carey mentioned?

Yeah. I think a great question, Bert. I think to your point, to start with the legacy programs. The first one is still due to wrap up in Q4. So, we're tracking kind of punch list items in the high 90%-s, 97%-plus complete by the end of the quarter. So again, we're still tracking to Q4 wrap up, which is great to have that behind us. Again, that one sits in equity and earnings. Second one is a self-performed program. That is still projected to wrap up late 2024. So those are kind of on track, no change from prior quarter, I would say -- no significant change from prior quarter. When it comes to kind of the bid pipeline and the backlog, we're definitely focused on expanding margins. I think at the Investor Day, we talked about 20 to 30 basis points per year. We're pushing the teams hard to deliver on that, and we're starting to see that in the bid pipeline and the backlog.

And just one addition, Matt indicated, the first program is 98% complete. The second program is 84% complete.

[Operator Instructions] The next question comes from Tobey Sommer with Truist. Your line is open.

Thanks. I wanted to ask you about the M&A market and -- in your appetite across the two segments. Are you seeing targets that meet your criteria and sort of are the right size, et cetera? We recently attended an M&A conference and the pace of activity and available things in the market was just kind of low. So I'm curious what you're seeing.

Yeah, thank you, Tobey, and good morning. So, our appetite is going to be to continue to pursue M&A. That's been a key part of our game plan and critical to our growth, and I think that's really helped us win all these large pursuits, which testified by 13 wins this year, greater than $100 million exceeding last year's record of $11 million -- or $11 million for the total year. I'd use the last two M&A examples as ones that are in our sweet spot and crossover. IPKeys is a company that does cyber compliance and monitoring specifically for power utility companies as well as water companies. So, it's a nice intersection between our Federal and our Critical Infrastructure business. Likewise, Sealing Technologies, while most of their work to date has supported the Department of Defense and the intelligence community, we're looking at combining their capabilities with the IPKeys capabilities and new product offerings. And Sealing Technologies' fly-away kits can also be used for commercial applications. As far as criteria and meeting the right size, we're going to keep our strict criteria, which greater than 10% topline growth and 10% margin expansion. And I'll also just mention I.S. Engineers, they provide transportation engineering. And while that's predominantly on our Critical Infrastructure side, some of the work they do there can also help our Engineered Systems Group on the Federal side of the house.

Thank you. And then could you refresh us on what the impacts were on the -- either the income statement or cash collections contract awards in the last government shutdown so we could know sort of what to look for in terms of potential impacts should one unfold over the next coming months?

Yeah. So the last government shutdown, we were only impacted by one contract that was a shutdown that occurred late 2018, early 2019, and that was our FAA contract. So I would say it really depends on what is exempted from the shutdown process as they continue to go forward. My personal opinion, I expect that we're going to continue to see continuing resolutions. The current CR ends November 17. We've learned how to deal with CRs. There's been 47 of them between FY '10 and FY '22, those have lasted for a duration of 1 to 176 days or just less than six months. So we know how to deal with that very well. And the nice thing with the Parsons' portfolio in a CR perspective is 50% of our portfolio is outside of the federal budget because we have the commercial business and the international business. We also have very strong backlog at $8.8 billion, 59% of that is funded backlog. And we have $14 billion of contract wins that we've not yet reflected in bookings or backlog. So, I feel our portfolio is in very good shape to withstand the CR and remain optimistic that we will not have a shutdown.

Yeah. And Tobey, specifically on the topline side, FAA was impacted by about $20 million back in '19 during that shutdown, so just to give you kind of a directional. But importantly, the DoD was exempted at that point.

Thank you very much.

Thanks, Tobey.

Thanks, Tobey.

[Operator Instructions] The next question comes from Andrew Wittmann with Baird. Your line is open. The next question comes from Andrew Wittmann with Baird. Your line is open. [Operator Instructions] The next question comes from Cai von Rumohr with TD Cowen. Your line is open.

Thank you very much, and terrific quarter, guys. Very impressive.

Thank you, Cai.

So, what do you have baked into your guidance for a shutdown? I agree with you totally, CR is not going to be a big deal, but a shutdown and if it's 45 days, what would happen to the FAA? And is there any incremental margin impact? Like if you lose $20 million of revenue, is the incremental margin 20%?

Yes, I'll start and then Matt can address the margin impact. So because of the type of services we provide, first, again, 50% of our portfolio will not be affected. But because of the type of services, we provide the alignment with the national defense strategy, everything going on in the world today, we remain optimistic that during a shutdown, most of our programs are going to continue. Just again, as an example, FAA being the only one that was impacted last 2019 shutdown. Matt, on the margin?

I would say, Cai, specifically, if there were no shutdown, I think we would kind of trend toward the higher end of the guide. At the midpoint, we've got -- the great news is, if you look year-over-year, our funded backlog is up about 13%. So, we've got really strong funding on our existing jobs. And so, we feel pretty good. But for FAA specifically, you can probably think about it as a 10%-ish and the majority of the work ranging in that 8% to 10%. So if you had a $20 million or $40 million, it would be $2 million to $4 million of EBITDA, I would say.

But I guess the issue is like, so if you can't do the work, employees are there and presumably want to get paid. So, is the incremental margin higher just because I assume you have to pay their salaries, even though they're not able to bill?

Yeah, it's kind of a mix, Cai. There's a mix of furlough, there's PTO, there's modified time. So the team is really effective at working through those things, but I don't suspect it will be a pure absorption of all the employee costs.

The other thing that we have available is research and development. So we either use combination PTO or research and development.

Okay. Great answer. And then how is hiring? I mean, when you're growing 20% two quarters, does that put any stress on your ability to hire folks and your ability to kind of control the growth?

So both our hiring and retention are strong. Our retention year-over-year continues to improve. And hiring has been great, obviously, to be able to keep up with growth. I would say our human resources team as well as all of our four of our business units are laser-focused on both the hiring and the retention and doing an excellent job.

Yes, I'd say, generally speaking, Cai, we've been investing in the support functions appropriately to support the growth.

Terrific. Thank you so much.

Thank you, Cai.

[Operator Instructions] The next question comes from Louie DiPalma with William Blair. Your line is open.

Carey, Matt and Dave, good morning.

Good morning, Louie.

Carey, your Middle East business reported 30%-plus revenue growth for the third consecutive quarter. You mentioned your customers in the Middle East have added scope to existing projects. Is there visibility for Middle East revenue to continue to expand from here?

Thanks, Louie. So Middle East has been very strong. We're fortunate again that we're on 505 of the Saudi Giga projects. The ones that I would say are particularly important to us are new on the line, NEOM's THE LINE, NEOM OXAGON, as well as Qiddiya. We're also outside of Saudi Arabia, though, seeing growth. Saudi Arabia has its vision 2030, but they're similar visions that have been established in the UAE, both in Dubai and Abu Dhabi for projects of the '50 and Vision 2040. And then Qatar also has a vision 2023. So, we expect to be able to continue to grow in the Middle East. Obviously, 30% plus is very strong. We'd love to be able to keep it at that rate. But I do think we see a very long-term trajectory out through 2050 of continued Middle East expansion.

Great. And also recent data shows that the intel community budget had a big increase in fiscal '23 and is in line for another large jump in fiscal '24, assuming the budget passes. You referenced several cyber intel contract wins. Can you discuss how your acquisitions have enhanced your solutions portfolio? And have you been able to take market share from competitors and take contracts away from competitors because you're definitely growing faster than competitors in this intel market? Thanks.

Yes. Thanks, Louie. So I'll take the second part first. We don't generally target market share takeaway. We are really after the new and emerging customer challenges. So, if you look at our capabilities in cybersecurity, we play at the very top end of the pyramid. Again, 75% roughly offensive, 25% is defensive in our portfolio. The companies we bought have all enhanced our cyber capabilities recently. I mean if I start with Sealing Technologies, Sealing Technologies has fly-away kits where they can basically deploy these kits to be able to enable defensive cyber operations security on systems and networks for customers. They support the intel community and the Department of Defense. But as I mentioned on the call, we also see potential expansion there to our commercial clients as well. IPKeys likewise, has provided capabilities. They do cyber, compliance and monitoring specifically for energy companies and water companies. For the energy companies, that's compliance with the NERC and FERC standards and making sure that companies have NIST compliance. All of these are very important as we look forward. Cyber will be an area that we continue to make acquisitions in. It's one where I feel that we've bought discriminating companies. It's enabled us to win critical jobs like the $1.2 billion GSA job we highlighted last quarter.

Excellent. Thanks, Carey. That's it from me.

Thank you, Louie.

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

Hey, good morning. Congratulations on the good quarter here.

Thank you, Josh.

Thanks, Josh.

Just following up on that, with the acquisition of Sealing, the $110 million you're expecting in 2024, how large is your overall cyber exposure at this point? And should we expect that to have above corporate average margins?

Yeah. So, cyber represents about 13% of our portfolio, and yes, it does have above average margins.

And with Sealing, do you expect that to be higher next year, that 13%?

The 13% as of today, so Sealing Tech adds an additional $110 million to the portfolio.

I would say, Josh, that the cyber business is growing double digits. So, we suspect it will continue to increase as a percentage of the company.

Got it. And then just on the $250 million radiation device win, how much of that is hardware versus software services? And then do you see that as a market which could find some international interest as well?

Yeah. So the majority of the radiation device win is systems integration. So we're actually putting the system together that performs the testing at areas like airports and ports, for example, and also it could be used on the border as well. We do see market expansion there. We have a pipeline both in the United States, but that could potentially expand international.

Okay. Thank you for the time.

Thanks, Josh.

[Operator Instructions] Our next question comes from Andrew Wittman with Baird. Your line is open. Our next question comes from Andrew Wittman with Baird. Your line is open. [Operator Instructions] The next question comes from Noah Poponak with GS. Your line is open.

Hey, good morning, everyone.

Good morning, Noah.

Good morning, Noah.

Carey, you've discussed here the possibility of a shutdown versus short-term extensions. It seems like the longer they are short-term extensions though, the less likely there is actual full year bills, and we live in this unique situation where the debt limit deal says there's this 1% cut kind of across the board on the discretionary side, if there are no bills. How are you -- just given you have a really good perspective on these macro things, what do you think is the likelihood of that? How are you managing Parsons relative to that possibility?

Yeah. Thanks, Noah. So to your point, the debt limit did set in place a cut, and that cut would occur at the start of April. So, the new House Speaker has said he's looking at continuing resolutions. One option is to run until January. One option is to run until April. But he is definitely factoring in that 1% cut as he makes those decisions. I would say, again, when you look at the parts of the budget, where we focus is growing between 5% to 12% compound annual growth rate. The areas that we play cyber and intelligence space and missile defense and critical infrastructure protection are very likely to be the last areas that are going to get cut, given the global tensions that are occurring right now around the world.

Okay. Does the growth of this year being so strong, just set up a situation for you next year where the compares are so tough that the growth rate decelerates significantly? Or with the growth rate that high for one year and the amount of new business wins you have, do you not expect -- or should we not be anticipating that significant of a base effect next year?

I'd say, Noah, that when we look at the longer-term planning at the Investor Day, we talked about 4% to 6% growth. And so, the baseline we've been telling folks is go off the updated guide and assume the same kind of growth rates. Obviously, 20%-plus is a little bit bullish going into 2024. But we're still comfortable that the range of guide provided at the Investor Day of the new base is appropriate.

We plan in February of next year to provide updated long-term targets. And I would say one of the big focuses is keeping up our competitive win rates, which have been close to 70% throughout the year, and if we can continue that type of performance. But to Matt's point, we've clearly had a great year.

Okay. And then, Matt, just on margins. If I kind of go to the high end of the new EBITDA range and assume CI adjusted is kind of flat sequentially around that 8% would imply Federal Solutions closer to 9%. Is that kind of what you're looking for in the fourth quarter? And then I guess, just run rating from here, are we still thinking FS is over 9%? And can CI just kind of keep moving higher from this quarter? Or will that maybe step down again before it then sustainably is high single digits?

I'd say our goal, of course, is double-digit margins for CI within a few years. I think that's a little bit of -- a couple of years still as we get through these challenged programs. We did have a little bit of a helper in Q3 related to a change -- a positive change order. So, to your question, on the Federal margin, for the total year, we're still expecting mid-9%s, which infers like 8.9% at the -- 9%s at the high end and then 8.9% at the midrange, so for Q4 specifically. So to your point, I think we still expect Federal to be kind of low 9%s to mid-9%s, long-term goals being mid-9% for federal. And then for CI specifically, we're still expecting margins to continue to expand. We really like seeing Q3 at almost 10%, and that is kind of our long-term goal.

Okay. Sorry. And did you quantify in just an absolute millions of dollars, the item in CI in the quarter?

We did. It's about $10 million.

Okay. Thank you so much.

We had a couple of quarters where there was a lower margin change order. This was the offsetting upper -- the higher-margin change order this quarter, it was about $10 million.

Got it. Super helpful. Thank you.

Thanks, Noah.

Thanks, Noah.

[Operator Instructions] Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Good morning, guys, and thank you. Great quarter. I think I'm going to ask Noah's questions, but in a slightly more positive light. So, obviously, this growth is super phenomenal and industry-leading. What would you say you attribute it to? Carey, you alluded to, you've been competitively winning 70% of your contracts. So, as we think about that, like how do you think that translates into growth for 2024? I know you're still not even in your planning process yet, but these are your one of contracts that are just starting that are competitive wins, and that's how we should think about it? Or can you shed some light there?

Thanks, Sheila. So I would say, yes, we've had strong competitive win rates. We're also again in six growing markets, which is really nice across the portfolio, across the two segments. All four of the business units have been growing with particular strong growth out of Mobility Solutions and Engineered Systems. We've done a great job continuing to win what I call new and emerging contracts, be able to win large single-award contracts that have ceilings that we can drive task orders to. And then we're really just at the very start of the United States infrastructure spend, and we're facing a Middle East spend that's going to last for decades. So I would say those are the areas that I attribute to the growth. And I think it's terrific that the team has been able to capitalize on all the tailwinds that we're facing in our end markets.

And Sheila, one thing I would add is with all the success we've had, we have the $8.8 billion in backlog, plus we have $14 billion of awarded not booked. So again, that number continues to grow, and we're really happy with the continued to execute on the existing jobs and the potential ceiling that will come from those.

Thank you. And then maybe if I could ask another question, both for CI and Federal Solutions. How do we think about the unfortunate events in Israel and Gaza? And what's going on there? And how that could potentially impact your business through intel awards or infrastructure are also negatively impacted depending on the location?

Yeah. So first, I'd say we're very saddened by what's occurred in the Middle East and the tremendous loss of life. We are staying very close to what's transpiring. President Biden, for example, I just had a call with Prime Minister of Saudi Arabia on October 24. They're very much aligned in how they're looking at things, which is how do we establish security in the region? How do we support humanitarian assistance? And so, I would say our job, whether it's in Critical Infrastructure or in Federal Solutions is to provide the necessary support to our customers, and make sure that whatever we do helps out the region. We have a strong presence there. The work that we do there will continue. It's very important to those nations. So I don't see any downside impact. But I would say, again, our objective is really to do what we can to provide stability.

Perfect. That's super helpful. And maybe one last one, if you don't mind, Matt, you said on Critical Infrastructure, $10 million was the positive event in Q3. So, as we think about margins there, they've obviously been at a lower 5.5% in Q2 and kind of fluctuating around, how do you think we best sort of think about that for '24?

Yeah. Great question, Sheila. I think our goal is, of course, to get this first challenge program behind us this year. It's still scheduled to wrap up in Q4. So, that will be a nice tailwind for us. I think from a guidance perspective, at Investor Day, we talked about 20 to 30 basis points, so somewhere in the 8.8% to 8.9%. The majority of that, as we've talked about before, will come from CI. So if you think of Federal still in the low 9%s, call it, 9.1% to 9.3%, the math on CI would be kind of mid-8%. So, I feel like the business is heading in the right direction. The backlog performance is performing at accretive margins. And so, we're getting some of these challenges behind us.

Perfect. Thank you.

Thanks, Sheila.

Thank you.

[Operator Instructions] The next question comes from Mariana Perez Mora with Bank of America. Your line is open.

So, my question is going to be a follow-up on M&A. How is the pipeline? How are the -- how is the pricing environment and competitiveness for those deals? Because you usually have acquired companies that you're really close in, and I was interested to learn details about like how that pipeline is looking?

Thanks, Mariana. The pipeline is very strong in both Federal and Critical Infrastructure. I mean we're really pleased that we've been able to close the three acquisitions we've been able to do this year. We're always kind of ranking and restacking that pipeline to end which one is most important based on the financial criteria of greater than 10% topline growth, greater than 10% EBITDA. And then looking at the technological differentiators, particularly on the Federal side, how do we continue to strengthen in cyberspace in missile defense and critical infrastructure protection. And on the infrastructure side, how do we double down in geographies that are going to be very important across the United States, but also considering Canada. We've been able to continue to find terrific companies and are really glad to welcome them to the Parsons' portfolio. We've also been able to do this mostly on a preemptive basis, so we try to avoid auctions. That's enabled us to stick within our standard multiples of about a 10 times to 13 times. The most recent one we did with I.S. Engineers was 7.7 times multiple. So, we're really pleased with the terrific companies we've been able to buy and the multiples we've been able to buy them at.

As you expose yourselves to the infrastructure bill across the U.S. and with the recent Texas acquisition, what other states do you think you have opportunity to tap in or will be interested to double down?

Yeah. So when you look at a lot of funds in the infrastructure bill, 70% of those come out through what's called formula funds. And those are generally based on the population of states and their growth over time. So, it tends to be the larger states that get the money. Parsons is fortunate. We're positioned in all 50 states, but we've set in place a list of Tier 1 states. They include states like California, New York, Florida and Texas, for example, that are expected to gain quite a bit of infrastructure bill funds.

Thank you. And last one also related to this topic. How you think about buying the companies versus doing joint ventures when you approach those opportunities?

So I'd say, first, we look at, are we going to build by our partner. So it's, do we build it internal, and can we do that under a research and development and capital expenditures and get there in the timeframe that is needed to deliver our customers' mission? Second, we look at should we partner as an area that is core to our company and if it's not core, then we'll go to a partnership route. And then third is, if it's a core area of our company, we do a gap analysis. And we specifically outlined what technologies we need to be able to continue to move up the solutions integration value chain and be able to bid and win in prime larger contracts. So that's kind of our standard criteria. From a joint venture, I would say, while we do joint ventures, we've started to reduce the number of joint ventures that we do. We will only joint venture in instances where a customer really wants that or where it's required for past performance to win a contract.

This is all the time that we have for questions. I would now like to turn the call back to Dave Spille for closing remarks.

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