Ladies and gentlemen, thank you for standing by. And welcome to the Parsons Third Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advice that today's conference is being recorded. [Operator Instructions].

Thank you. I would now like to hand the conference over to your speaker today, David Spille, Vice President of Investor Relations. Please go ahead, Mr. Spille..

Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2019 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Chuck Harrington, Chairman and CEO; George Ball, CFO; and Carey Smith, President and Chief Operating Officer.

Today, Chuck will discuss execution against our corporate strategy, George will provide an overview of our third quarter financial results and then Carey will review our operational highlights. 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 registration statement on Form S-1 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. I will now turn the call over to Chuck..

a $968 million Navy contract and a $427 million Air Force Research Laboratory contract. We also announced that we joined the Northrop Grumman team that is pursuing the Air Force Ground Based Strategic Deterrent program, which is a U.S.

land-based intercontinental ballistic missile system that will provide new missiles and related systems and infrastructure to the Minuteman III system operated by the Air Force.

We were honored to be selected as a partner on Northrop Grumman's team and believe it reflects the strength of our brand in both the federal solutions and critical infrastructure markets. It is too early to quantify the financial implications for us if Northrop wins this program.

However, if the Northrop Grumman team is selected, we believe it will be materially positive to both our future revenue and margin results. In space, as announced in August, we celebrated the successful multi-manifest launch of a small space vehicle payload.

This important mission represented the first time the Air Force Space and Missile Systems Center deployed a small space vehicle prior to the primary payload. Within our connected communities business, we launched the Parsons Smart Cities Challenge with our partners, including Amazon Web Services, Verizon and CoMotion.

The goal of the Smart Cities Challenge is to improve the functionality of cities by solving complex mobility challenges, such as frustrated motorists sitting at intersections waiting for lights to change.

With Parsons Intelligent Intersections, cities and counties can leverage existing data to provide automatic traffic retiming based on changing traffic patterns. The winner of this challenge will receive a free 1-year trial of Parsons Intelligent Intersections solution for selected transportation corridor.

We were also selected as part of the TransCore team that will develop the New York City congestion pricing system to reduce traffic on crowded city streets, while providing billions of dollars in essential funding to transform the New York City public transportation system for generations to come.

These 2 initiatives are expected to significantly increase mobility around and through cities, reduce carbon footprint and improve safety. I want to acknowledge the corporate social responsibility awards we received in the third quarter. Last quarter, we discussed our diversity recognition and our Bridges to Prosperity work.

This quarter, we were recognized for our safety and environmental initiatives. In September, we were awarded the National Safety Council's Robert W. Campbell Award. This prestigious international award honors 1 company each year for achieving excellence through the integration of environmental, health and safety management into business operations.

Additionally, our Ontario, Canada team received a Certificate of Recognition from the Infrastructure Health and Safety Association. This recognition follows a comprehensive audit of our health and safety management system. We are very proud of these awards.

Safety and sustainability are among our core values, and these awards demonstrate our commitment to safety and health in the workplace and in the communities in which we operate. This dedication is why we're recognized as a global leader in safety as well as a firm with technical solutions that protect and improve the environment.

Finally, earlier this morning, we announced Carey's promotion to President, in addition to her current role as Chief Operating Officer. This promotion recognizes Carey's contributions to our operational performance and business transformation and further aligns core operational functions with our teams supporting our clients.

We expect enhanced agility and responsiveness to business needs. In summary, we had a strong third quarter. We delivered solid financial results, gained momentum in our large and growing markets, maintained our healthy balance sheet post-QRC acquisition and continue to be recognized for our corporate social responsibility initiatives.

With that, I'll turn the call over to George to discuss our third quarter 2019 financial highlights..

the income statement, cash flow results, balance sheet and contract awards. I will also discuss certain financial results on an adjusted non-GAAP basis where we believe doing so provides a meaningful comparison to our prior financial results.

As Chuck indicated, we reported record third quarter revenue, adjusted EBITDA as well as strong cash flow results. Total revenue for the third quarter increased 5%, with an organic revenue increase of 1% from the third quarter of 2018.

I would note that the organic growth rate was impacted by approximately $20 million of unusually high volume on 2 contracts in the Federal Solutions segment in the third quarter of 2018. Otherwise, Parsons' organic growth would have increased by 3% for the company as a whole and by 5% for the Federal Solutions segment.

Indirect SG&A expenses increased $28 million from the third quarter of 2018, due primarily to additional costs associated with acquired businesses, transaction-related expenses and increased bid and proposal costs. GAAP EPS for the quarter was $0.57 per share, and adjusted EPS was $0.53.

GAAP EPS reflects – GAAP EPS results were impacted significantly this quarter by acquisition-related intangible amortization costs, transaction-related expenses and the establishment of $29 million in deferred tax assets, associated primarily with elections made in connection with the filing of the company's 2018 S-Corporation tax return completed during third quarter.

Adjusted EBITDA of $89 million was up nominally from last year and equated to an adjusted EBITDA margin of 8.7%. On a sequential basis, adjusted EBITDA increased $13 million, and our margin improved 100 basis points from the second quarter of 2019.

The increase was driven primarily by technical performance incentive fees associated with the successful achievement of a significant contract milestone in the Federal Solutions segment. I'll turn now to our operating segments, starting first with Federal Solutions, where third quarter revenue grew 10% year-over-year.

This increase was due primarily to the acquisitions of OGSystems and QRC with an underlying organic growth rate of 1%. After excluding approximately $20 million in revenue associated with the unusual prior year activity I mentioned earlier, year-over-year organic growth was 5% in the quarter.

Federal Solutions adjusted EBITDA grew 11%, and our adjusted EBITDA margin increased 10 basis points to 10.4% year-over-year.

This was driven by contributions from our acquisitions and the incentive fees mentioned previously, offset by increased bid and proposal costs and a greater allocation of corporate indirect G&A costs through our Federal Solutions segment, in line with its growing share of our overall business.

On a sequential basis, adjusted EBITDA increased $15 million, and our margin improved 290 basis points from the second quarter of 2019, driven primarily by contract incentive fees, the acquisition of QRC and underlying business growth. Now a few words regarding our Critical Infrastructure segment.

Third quarter organic revenue grew 1% year-over-year, driven by growth on existing contracts. Critical Infrastructure adjusted EBITDA decreased $4 million from the third quarter of 2018, and our margin decreased to 7.2%.

These decreases were primarily driven by lower equity and earnings from unconsolidated joint ventures, including the completion of a large joint venture program and an increase in SG&A costs, partially offset by an increase in project margins from higher-margin new awards.

Adjusted EBITDA decreased $2 million from the second quarter of 2019, driven primarily by the pull forward of fee income associated with a change order, as discussed on last quarter's earnings call. Now I'll turn to cash flow and balance sheet metrics. Net DSO for the quarter was 58 days as compared to 67 days at the end of the third quarter of 2018.

The improvement was driven by strong cash collections in both segments. During the third quarter, we generated $161 million of free cash flow, comprised of operating cash flow of $179 million and capital expenditures of $18 million.

Our balance sheet at the end of the third quarter reflects gross and net debt of $249 million and $115 million, respectively. As Chuck noted previously, we funded the $214 million third quarter acquisition of QRC entirely through available cash and free cash flow.

As a result, we ended the quarter with a net debt leverage ratio of 0.4, which along with continued strong free cash flow will enable ongoing investments in our growth strategy. And now turning to awards. We reported contract awards of $1.1 billion in the third quarter, representing a book-to-bill ratio of 1.1 and 1.2 on a trailing 12-month basis.

Total backlog at the end of the third quarter is $8.3 billion, up 4% from the third quarter of 2018.

Finally, on October 15, we filed an 8-K indicating that we expected to make treasury stock purchases in the amount of $5 million to $10 million in satisfaction of the company's obligation to fund lockup period ESOP redemptions, in excess of the $52 million IPO dividend.

Actual amounts paid by the company totaled $5.4 million and resulted in the purchase of approximately 157,000 nonpublic shares from ESOP retirees. With the expiration of the lockup period on November 3, ESOP participants that are retired from Parsons and are over 62 years of age can request distribution of a portion of their shares.

We anticipate these share distributions will slowly increase our public float over time, but the number of shares entering the market over any given period will be limited in general by qualified plan restrictions on the ability of participants to receive distributions as well as the installment provisions of the plan.

For these reasons, our average daily trading volume has remained largely unchanged since the expiration of the lockup period. With that, I will turn the call over to Carey to discuss some of our third quarter operational highlights..

Thank you, George. As Chuck and George indicated, we had a strong third quarter. We delivered 1% organic revenue growth in both segments despite a tough comparable quarter in our Federal Solutions segment.

Organic growth in our Federal Solutions business would have been 5% excluding the aforementioned unusually high volume on 2 contracts from the prior year period.

We continue to win a significant amount of work and reported a 1.2x book-to-bill ratio on a trailing 12-month basis, driven by 1.3x in our Federal Solutions segment and 1.1x in our Critical Infrastructure segment, positioning us for continued growth.

As Chuck noted, our third quarter book-to-bill ratio for Federal Solutions was 1.7x, and we are bringing large contracts in growing and enduring markets. During the third quarter, we registered 3 single-award wins over $100 million, including a $590 million cyber contract.

I should also highlight that we only booked $112 million on this contract, in line with our conservative approach to booking new contract wins in the backlog. Notable third quarter awards included the new $590 million single-award Combatant Commands Cyber Mission Support contract by the General Services Administration.

Under this contract, we will be researching, developing, testing and evaluating tailored cyber solutions for cyberspace operations, advanced concepts and technologies and integrating operational platforms across multiple domains.

This was a significant win for Parsons in it exemplifies the synergies that we're driving by combining our legacy Parsons cyber solutions with our Polaris Alpha, OGSystems and QRC Technologies capabilities. Historically, we would have had to take a subcontract role on this large of a cyber contract.

I'm very proud of the way our Federal Solutions team is capitalizing on our scale and our significant capabilities. We were also awarded a new $229 million contract from the U.S. Army Corps of Engineers to repair Bucholz Army Airfield.

We believe this large revenue and high-margin contract will be an anchor win for us to further expand our missile defense and space presence in the Pacific Rim region. It also builds upon the work we're currently doing on Kwajalein Island under the Missile Defense Agency's TEAMS contract.

We were awarded a $137 million contract modification for technology insertion and completing the testing and commissioning phase of the Department of Energy's Savannah River Salt Waste Processing Facility.

And finally, we were awarded a total of 3 large defense and cyber multiple-award IDIQ contracts this quarter, which expands upon our robust portfolio of more than 75 prime IDIQ contracts and over 20 OTA contracts. We've had success at winning our fair share of business under existing IDIQ vehicles.

And year-to-date, we've been awarded over $115 million of awards under OTA contracts. In terms of operational excellence. We successfully completed a key test to validate the capacity of a Salt Waste Processing Facility at the Savannah River site. It performed in line with design criteria, a significant milestone that moves the plant closer to startup.

Once operational, the Salt Waste Processing Facility will process the majority of the site's salt waste inventory by treating highly radioactive salt solutions, stored in underground tanks at the site.

This quarter, our enhanced network visualization environment or ENVE contract with the Army achieved a 3-year authority to operate, which will allow for fielding of foundational cyber capabilities to the war fighter. The Army has identified more than 20 units across their Department of Defense Services to receive this critical capability.

I also want to highlight that our Performance-Enhanced Airborne Reconnaissance Low or PeARL Flash product was recently evaluated against 3 competing intelligence, surveillance and reconnaissance systems and was rated the best geospatial imagery solution by the MITRE representatives of the Air Force Special Operations Command.

The PeARL product line is a powerful solution that delivers very accurate, high-resolution imagery to our military, intelligence, civilian and humanitarian customers. Finally, the integration of our OGSystems and QRC acquisitions continue to go well. As I previously mentioned, both companies play a key part in our $590 million single-award cyber win.

As a partner to Perspecta engineering, OGSystems was awarded a subcontract on the National Geospatial-Intelligence Agency Enterprise Engineering single-award IDIQ contract to perform full life cycle systems engineering and integration. The total Parsons value of the enterprise engineering contract may reach $165 million.

OGSystems has received work share on the first task order of the contract and has begun performing systems engineering and integration services. With that, I will turn it back over to Chuck..

Thank you, Carey. In summary, we delivered solid financial results, generated strong free cash flow that enabled us to fully fund our QRC acquisition, won several large strategic contracts and continued our expansion in growing and enduring markets.

I'm excited about our future as we leverage our business momentum, technology-driven solutions and robust balance sheet to drive future growth and shareholder value. Now we'll open up the line for questions..

[Operator Instructions]Your first question comes from the line of Gavin Parsons with Goldman Sachs. Your line is open..

Hey, good morning, everyone..

Good morning, Gavin..

Do you mind giving us a sense for how an extended continuing resolution might or might not impact your business? And how much of your growth is tied to the kind of new, new work?.

So I think, clearly, an extended CR eliminates new starts. We are blessed to have a large number of multiple-award IDIQs as well as single-award IDIQs. So in the near, near run of a long CR, I don’t really see much, if any, impact. As the CR drags on and on, of course, it could have an increasing impact.

But right now we don’t see major impacts from a short to medium-range CR..

Okay. Thanks. And on GBSD, I know it’s too early to size it, but can you talk a little bit more about what you’ll be doing on that program with Northrop, and if they win, when that might start to contribute? Thanks..

Our scope on that will be around some of the classified facilities that will need to be either modified or newly built that will house a lot of the control systems and some of the operations that go on in that contract.

A lot of the scopes, obviously, since it’s still being concerted is yet to be defined in detail, and we don’t expect material impact of that contract till 2021 at the earliest..

Thank you..

You welcome..

Sheila Kahyaoglu with Jefferies. Your line is open..

Hey, good morning, everyone. And thank you for the time. A very good quarter within Federal. EBITDA margins over 10% in the quarter.

I guess first, how sustainable do you think those margins are? And when we think about your medium-term targets of corporate margins over 10% over the next 3 to 5 years, can you talk about the main drivers of that? How much is through Federal versus Critical, the improvements there? And how do we think about – one other part to that question, sorry, guys, is the new contract wins, such as the cyber contract, the impact to profitability for those?.

Thank you, Sheila. Great questions. Yes, we still believe we’re on track for our goal of 10% EBITDA margins and increasing our growth. All of our new contract wins are consistent with that. Our acquisitions have been consistent with that. So we’re on track.

As it relates to the Federal Solutions business, that’s obviously been our star performer from a margins perspective, even after picking up more of the corporate overhead allocation. I’ll let Carey address that in a bit more detail as well as the impact of the new cyber contract.

Carey?.

Thanks, Chuck. We do believe that our margin performance is sustainable. We’ve been bidding much higher margin jobs, both in Federal Solutions as well as Critical Infrastructure. In Federal Solutions, our wins have all been in key high-growth areas, including cyber and intelligence, missile defense and space.

In Critical Infrastructure, as you’ve seen, we’ve been very selective and focused and making sure that we’re bidding high-margin jobs there..

Okay. Thank you for that color. And then just on the $590 million Combatant Commands contract, can you talk about what the scope of that contract is? And I think you mentioned a 60% win rate.

Is that all-inclusive of everything you bid on? Can you talk about what your success rate has been on new contracts or new pursuits and what it looks like historically? So multiple questions, apologize, guys..

Certainly. So let me take the win rate question first. So from an overall win rate perspective year-to-date for Parsons, we’re at 42%. That’s being driven by our Federal Solutions win rates of 49%. We also had a very strong quarter this quarter at 47% win rates, driven once again by Federal Solutions, which achieved 63% win rates.

From a new business perspective, we’re very pleased with our win rates overall and also from our recompete win rates, they remain very strong. For the cyber combatant’s contract awards, we’re responsible for supporting the Department of Defense Services as well as the COCOMs, and our work includes a whole variety of tailored cyber solutions.

So it’s operational capabilities, it’s training solutions for cyber space as well as advanced concepts and technologies. I want to reiterate too the importance of the acquisitions. This award really combined the best of Parsons’ capabilities to include Polaris Alpha, OGSystems and QRC. They all contributed..

Great. Thank you very much..

Tobey Sommer with SunTrust. Your line is open..

Thank you. Could you expand a little bit on the opportunity in the space domain? In particular, and speak if you could, a little bit about your efforts in the small payload arena? Thanks..

Thank you, Tobey. Great question. We have, obviously, the LMSI contract, which allows us to integrate payloads, usually small cube sets into a spare space of larger appliances being put into space really does a couple of things.

One, it allows for a customer that’s got something that’s coming to market they want to get into orbit quickly to take advantage of another launch that’s taking place in the near term.

Secondly, if we think about it from an environmental perspective, it allows us to use all of that energy that’s being put to put something into space now is taking more into space and more productive.

The integration that we do, which leverages our high bay facilities that we have in Southern California and elsewhere, allows us to bring multiple additional devices into a compartment on the satellite and launch.

So as the number of launches are increasing from both government and private sources, we think this is an opportunity that gives us great opportunity looking forward.

Additional areas where we’re playing in space are cyber controls, for space-to-ground, ground-to-space, space-to-space communications of data and otherwise as well as the command and control systems that we’ve deployed in the past.

Also, our work with the anti-hypersonic, our counter-hypersonic technologies for missile defense, which is a space technology. And lastly, our space situational awareness that we’ve been doing for some time.

And Carey, is there anything you’d like to elaborate on that?.

Yes. The only thing that I would add is we have our next 2 launches coming up for the small satellite early next year. So we’re going to be launching from a land sat and also another Advanced Extremely High Frequency system. And in addition to the items that Chuck mentioned, we’re involved in ground system resiliency.

One of the major problems is providing cybersecurity for those critical systems, and we perform quite a bit in areas of cloud migration of existing platforms..

Thank you very much for that. I was wondering if you could comment about performance fees and their contribution to profitability.

As you’ve ramped certain new programs, has the opportunity for greater contribution from those been amplified? Kind of trying to think about how we should – what we should anticipate on a go-forward basis in terms of that as a contributor to profit..

From an award fee and incentive fee perspective, our largest contract of opportunity is the Salt Waste Processing Facility.

Again, we completed the design capacity and performance test this quarter, and we have a significant contract for Operational Readiness Review milestone that’s coming up in the fourth quarter as well as the Department of Energy Operational Readiness Review coming up in the first quarter of next quarter.

Our award fees performance remains extremely strong on the contracts that we’re performing. It’s over 94%..

Thanks. Last question for me. Can you comment on your contract award and book-to-bill calculation? You cited that you only included a portion of your very large awards, so I was wondering if you could refresh us on how you arrive at those numbers so that we can interpret that..

We book very conservatively. For multiple-award contracts, we only book as we’re funded on task orders. For new contracts, we book conservatively. That was the case for the Combatant Commands. What we did is we booked the first year base year, but we did not book the option years..

Thank you..

And that’s – and, Tobey, that’s consistent with policy. So that’s consistent across all of our contracts..

[Operator Instructions] Edward Caso with Wells Fargo. Your line is open..

Hi, good morning.

Could you talk a little bit about sort of the environment, current continuing resolution, expectation of another one going through year-end? If we have a CR for the whole year, how does that affect your business? If we have a, heaven forbid, another shutdown, how good is the funding of your current programs to sort of work through that period? Could you just give us some sensitivity in your model? Thanks..

Thank you, Ed. I think the tenets that we have built the portfolio on and remain in effect for just such a situation as this is that we don’t think the threat to our nation’s safety reduced because we have a CR. So we think the additional investments being made by China, Russia, Iran, North Korea, et cetera, just continue unabated.

So in areas of missile defense, cybersecurity, investments in space, we think that those will find ways of continuing to be funded. And the beauty of having a large number of multi-award and single-award IDIQ contracts is they are the vehicles that allow you to continue in that environment. Obviously, new awards will not be made during a long CR.

So a year-long CR would see a – probably an uptick, in my opinion, of IDIQ task awards and a reduction, obviously, an elimination of new contract awards, in most, if not all cases.

Carey, anything you’d like to add there?.

From a shutdown perspective, Ed, we expect very minimal impact. During the last shutdown, we were only impacted on 1 major contract. So it was very minor..

Great. Can you help us with what the pro forma tax rate is in your calculation of your pro forma EPS number? What’s the tax rate? Thanks.

The pro forma tax rate in the current quarter, Ed, is approximately 35%, which is high due to the effect of income taxes in foreign regimes, particularly Saudi Arabia and Qatar, as well as Canada to a degree. We believe that as we move into the new year, our effective tax rate will be closer to 30%..

Great. Thank you..

Thank you, Ed..

Cai von Rumohr with Cowen and Company. Your line is open..

Hey, good morning. This is Dan Flick on for Cai. So 3 acquisitions in the space of 15 months, how have you managed to have the management bandwidth to handle them all? Are you feeling stretched thin at all? What have your key challenges been? And I guess just expectations moving forward for acquisition pipeline..

Thank you, Dan. Yes, in terms of management bandwidth and stretched thin, Dan, I mean we’ve been a serial acquirer for some time. So I think the team is stretched thin. And now that we’re getting more runway from the larger acquisitions of Polaris Alpha and OGSystems, things are humming well.

As Carey pointed out, one of the things that’s been most impressive is how our team has come together and speaks as one and has really dove into every proposal that even those that were in progress at the time, like QRC, as it relates to the Combatant Commands award, and that was impressive, get an award like that in Q3, and we already have QRC kit as a part of our quails and capabilities for that program.

Carey, anything you’d like to add to that?.

Just a couple of points. I think our integration approach at Parsons is unique. We really take the best practices from both companies. We put together parallel teams. They are comprised of the companies we’re acquiring as well as ourselves and define what that best company culture is.

The other thing we’ve done is we’ve integrated key leaders, in particular from Polaris Alpha and OGSystems onto our executive team..

Sounds good. Thank you..

Thank you, Dan..

Ronald Epstein with Bank of America Merrill Lynch. Your line is open..

This is Caitlin Dullanty on for Ron.

How are you thinking about capital deployment strategy over the next 12 months? And can you talk a little bit about how that fits in with the acquisition pipeline you’re seeing, which was asked in the last question?.

Thank you, Caitlin. Great question. The pipeline remains robust. We continue to see great companies come out who are looking for options. We have continued to talk to companies that are in our supply chain that support our customers.

And so we continue to see a robust pipeline and our plans for capital allocation are to continue our trend of acquisitions in the near term.

George, do you have anything you’d like to add to that?.

No, I totally agree with that. As we have done to this point, we would intend to be opportunistic purchasers. We – as we’ve said previously, we don’t like auctions. We like the certainty of execution, not necessarily get a bargain, but we really enjoy the certainty of execution on targets that we basically intercede with.

As we’ve also said previously, as a secondary issue, we’re open to share price repurchases at reasonable prices in order to offset at least in part the effect of a dilution of ESOP contributions which remains our primary retirement plan. And long term, I would not rule out consideration of a dividend..

Okay, thank you, that’s helpful.

And then how should we think about the allocation between corporate and indirect SG&A costs between the segments over time? And how did the allocation affect margins in Federal Solutions and when will that shift sort of conclude?.

As we continue to expand the federal platform over time, allocations from the corporate offices will continue to move in that direction. That will be a slow process. It’s been accelerated more recently by the effect of the acquisitions over the last couple of years. As to the impact in the current quarter, it was really quite nominal..

All right. Thank you very much..

Thank you..

Gavin Parsons with Goldman Sachs. Your line is open..

Hey, thanks for the follow-up.

If the budget environment stays fairly similar from a defense outlays or total government spend outlays perspective over the next few years, what’s the gating factor for your growth? Is it the amount that you can win? Is it how fast you can hire people? Is it how you’re managing the low-margin roll-off work? Is there a gating factor to growth?.

Yes, I think that all of those play a role in that, Gavin. The great news is there’s almost insatiable demand for the – to improve and enhance the cybersecurity of this nation. And the reason we’re moving more into solutions is to be able to drive our revenues higher than – and faster than our headcount growth.

There are limits to the number of highly cleared personnel that are available to support growth in any company in this space, but – hence the importance of driving solutions to meet the demand. And customers are becoming more oriented to thinking that way as well.

As it relates to contract wins and capability, we’ve got a lot of capability and a lot of backlog. So those are not areas that we see as throttles to our growth. And our win rate is high, and we get more and more selective in what we pursue..

In regards to the pass-through work, can you quantify that for each of the 2 segments and when do you expect to be done with that?.

That’ll probably take another 18 to 24 months, I would say, as contracts conclude and we don’t renew them. And these are of course ones that have low margins, because of high pass-throughs, they have little to no fees on them.

And that is probably in the range of $300 million to $400 million of additional contracts that will run off over that 18- to 24-month period..

Great. And then one more if I could. Was 2018 free cash flow particularly lumpy? Or can you grow free cash flow this year over last year? Thanks..

I’ll take that, Gavin. Our cash flow is – as you’ve seen over the last 3 quarters that we’ve reported upon is very lumpy. We tend to do better in the second half of the year than the first half of the year. So we’re quite optimistic that we’ll continue to see good momentum and strong free cash flow in the fourth quarter..

Okay. Thank you..

Thank you..

Matt Sharpe with Morgan Stanley. Your line is open..

Good morning and thanks for taking my questions. I was just hoping you guys could give a little bit more color on the broader environment here, maybe characterizing your demand across the 2 end markets. Obviously, on the federal side, it’s been fairly healthy of late but looks like critical infrastructure’s weakening sequentially.

Maybe sort of talk about whether or not that’s a function of end market or more selective bidding and stepping away from some businesses or what’s been underlying that dynamic..

Thank you, Matt. Actually, we’re seeing a robust pipeline in CI in markets like Saudi Arabia, Canada, and in fact, in the U.S. as more of the funding for critical infrastructure has gone to local and what they refer to as self-help districts from national transportation, highway bill, et cetera.

What you’re seeing is increased selectivity by us and most folks in the market and focusing on those contracts where we can generate higher margins, double-digit margins on our bid and jobs where we don’t have large numbers of pass-throughs of small business where we have no fee or whatever the driver might be that drove us lower margins.

So the pipeline is robust. The activity of proposing is strong, and more what you’re seeing is selectivity on our part to continue to assure that we are driving up margins, getting great cash flow and getting the growth where we want to get the growth..

Great.

And then just as a follow-up, as you guys look out over the next 12 months, your revenue build plan, what percentage do you have to go out and win versus what is already in backlog today?.

As we look at 2020, we have 8% repeat, we have 71% that’s from follow-on and 21% new..

Great. Thanks..

This concludes the time we have allotted for questions. I would now like to turn the call back over to Dave Spille for final remarks..

Thank you for joining us this morning. If you have any questions, please don’t hesitate to 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 the Parsons Third Quarter 2019 Earnings Call. We thank you for your participation. You may now disconnect..