Mariana Perez Mora: I’ll do a follow-up question on Federal (ph) Solutions. I’d like to understand how you’re thinking about the potential continued resolution into fiscal year ’24 because I do agree fiscal year ’23 is strong. The threats are not easing. But there is a political environment that could end up in a continual resolution next year. So how are you thinking about risk to that in your existing programs and also the opportunities there?
Carey Smith: Thanks, Mariana. A great question. On the continuing resolution, first, we have the ability to run a full year without seeing an impact due to the CR. I also mentioned earlier, we have $8 billion of contract ceiling value that we haven’t booked that we’ve been driving task orders over to, and that was a large contributor to us being able to achieve our organic growth. So we can run a long way kind of under our existing ceiling that we have in place. I’ll also say it’s kind of hard to speculate on the overall budget picture, but I will say Parsons in our overall industry, we’ve learned to be able to manage through this budget turbulence. We’ve obviously had it for decades now. And given that we have so much demand in both our national security and our Critical Infrastructure market areas, we can run quite a while without having any impact.
Mariana Perez Mora: Perfect. Thank you. And then if I may, another question on M&A. Could you mind discussing how is the environment on M&A, where do you see opportunities right now?
Carey Smith: Yes. Thanks. On the M&A area, we’re looking at both Federal Solutions and Critical Infrastructure. We’re going to keep our very high criteria be selective in the companies that we buy, look at companies that are growing greater than 10% on the top line, have greater than 10% EBITDA margin. And most importantly, our technologically differentiated to be able to accomplish our customers’ emerging missions. We have a robust pipeline and expect to continue our pace of doing at least one to two deals a year.
Mariana Perez Mora: How is the pricing of those right now? Are transaction prices adjusting to the new interest rate environment?
Matt Ofilos: Yeah, Mariana. We haven’t — to be honest, we haven’t really seen as much of a reduction in expectations on the sell-side. So we
Carey Smith: which is what we expected to come in. In the fourth quarter, we had some unfavorable rate impacts, a year ago, we had kind of a pickup on rates. And so if you look at the year-over-year, that’s basically what’s the main contributor there. Again from a margin perspective, I’d say federal delivered as expected at the 9% range for the year.
Matt Ofilos: Yeah. Sheila I’d add and Carey kind of hit on this but I’d say throughout the year, you saw we had really strong base and managed our cost well. So kind of the downstream effect of that is in Q4 when we update billing rates and we kind of come down and it has a negative impact. So I would say the programs that are running off really don’t have substantial margin impact. SWPF was favorable. Quad is probably a little bit of a lower margin. So that coming down could be a little bit accretive for us. And so the positive side of the rate impact as well as unfavorable for Q4. Longer term, lower rates helps us from a competitive perspective and gives us some more capacity within our single award IDIQ. So not a great story for the quarter compared to last year, but all-in-all, really positive to Carey’s point, 9% for the total year is in line with our expectations.
Sheila Kahyaoglu: And just when we look forward for ’23, the flat guidance, are there any puts and takes in that M&A as a potential contributor? Like why is, I guess, the outlook flat and how do we think about that?
Carey Smith: Well, from a margin perspective, we’re going up 20 basis points in 2023 over 2022. We have not assumed new M&A in there. So to your point, Sheila, that would definitely be additive as it has been as we’ve done past M&A, and M&A has largely been reflected in Federal.
Matt Ofilos: Sheila, were you talking on the top line?
Sheila Kahyaoglu: No. All good. No, that’s super helpful. And then just on CI, it was someone asked already, but the mid-single digit organic growth guide. How do we think about the Middle East contribution versus other regions?
Carey Smith: So the Middle East contribution will continue to be very strong. But I’d say we’re seeing strength across the board. North America has picked up both the U.S. with the IIJA funds roll out there as well as Canada, where they passed their bill back in 2016, and we’re involved in 27 of the leading 100 infrastructure programs, so roughly a third within Canada. I would say it’s just making sure that, again, we have measured guidance that we continue our hiring that we’ve been able to do and continue our retention and continue our program execution.
Sheila Kahyaoglu: Great. Thank you.
Operator: Thank you. And our next question comes from Cai von Rumohr with Cowen.
Unidentified Participant: This is on for Cai. Thanks for taking the question. It looks like your full year book-to-bill at Federal Solutions was below one in 2022. Given this, what should we expect for bookings in Federal Solutions in 2023? Thank you.
Carey Smith: Yeah. Thank you, Spencer. So we’ve planned for a book-to-bill of 1.1 for Federal in 2023. As you know, awards are very lumpy. I think what’s really important is the ability to drive organic revenue, which we’ve been able to do at 9% for the company, 12% in Critical Infrastructure, 6% within Federal. Continuing our strong win rates of 49%, which is very good. And then again, we have quite a bit of bookings that you don’t see reflected because our approach is to book the make sure that we get up to that level of funding, then we book the follow-on option years. So a great example there is our team’s contract for missile defense agency even though the award was $2.24 billion, we’ve only booked $618 million. I would also — one last point too, Spencer.
We were awarded two contracts right at the end of the second — right at the beginning of Q1, just missed Q4. One of them, we’ve already announced for $94 million for an Intelligence Community delivering cyber solutions. The second one is a large contract also that’s been negotiated and it falls within the Federal as well.
Unidentified Participant: Thank you.
Carey Smith: Thank you.
Operator: Thank you. And the next question comes from Louie DiPalma of William Blair.
Louie DiPalma: Hey, Matt and Dave. Good morning.
Carey Smith: Hi, Louie.
Matt Ofilos: Hi. Louie.
Louie DiPalma: You announced the large Faro Mine extension. Carey, are there other large environmental remediation projects similar to the Faro and Giant Mine programs in your pipeline?
Carey Smith: Yeah. So we announced Faro last year, and we announced Giant Mine this quarter, both of those are very significant jobs in the billions of dollars. And again, Faro, we’re running about 20 years and Giant will run about 12 years for us. There are other large reclamation jobs. What we’re starting to see is the United States is really putting an increased focus on it. We formed some partnerships with groups such as nations to be able to do a pipeline there. Now having said that, the two mines in Canada are some of the largest mines in the world. So the magnitude won’t be quite the same, but there are opportunities within the U.S. as well.
Louie DiPalma: Great. And these contracts are very long term in nature. In general, for environmental remediation projects that have like a 10-year duration, how does the revenue recognition and like margin structure work over the course of the contracts?
Carey Smith: So first off, Matt, we’ll have something to add, I’m sure here in a minute. But first, I will say on these contracts, they are continuation efforts, but we’re going to see expanded scope. So for example, on Giant Mine, we expect our scope is increasing by about 66% as we move into term 2 because the amount of work that has to be done versus term 1. Matt, do you want to talk about RevRec?
Matt Ofilos: Yeah. Just on the RevRec side, it’s standard cost to cost. So it would be as we — as the cost comes in, we’ll be recognized revenue, there’s no pre-recognition or anything on any substantive part of it. On the margin side, I would say it’s probably pretty flat throughout the period. The opportunity would be as they ramp up and grow, then we’ll get a little bit of an absorption opportunity. So there could be some growth in margin, but I don’t think it will be substantive enough to drive the overall company necessarily.
Louie DiPalma: Great. And switching gears, with the rising geopolitical tensions and accelerating from development of counter hypersonic missile activity, what are your general expectations for your Missile Defense Agency work in 2023 and beyond? It seems as though there was strong funding in the defense budget. But what are your expectations even if there’s a threat of a continuing resolution or a shutdown in 2024? Thanks.
