Parsons (PSN) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Oct. 28, 2026

CALL PARTICIPANTS

• Vice President of Investor Relations - David Spille
• Chair, President, and Chief Executive Officer - Carey Smith
• Chief Financial Officer - Matt Ofilos
• Director - George Ball

TAKEAWAYS

• Total Revenue -- $1.7 billion, representing a 2% increase driven by growth in cyber, electronic warfare, and transportation markets.
• Adjusted EBITDA -- $168 million, a 6% increase from the prior year period.
• Adjusted EBITDA Margin -- 10.2%, a record for the company and an expansion of 40 basis points.
• Critical Infrastructure Revenue -- $846 million, a record for the segment that grew 2% year over year.
• Critical Infrastructure Adjusted EBITDA Margin -- 11.1%, exceeding 11% for the first time due to stronger program execution and accretive acquisition contributions.
• Federal Solutions Revenue -- $805 million, reflecting 9% growth when excluding the company's confidential contract.
• Total Backlog -- $9.4 billion, a record level representing 6% growth year over year.
• Funded Backlog -- $6.8 billion, accounting for 73% of the total backlog and increasing 7% from the prior year period.
• Consolidated Book-to-Bill Ratio -- 1.1x, supported by $1.8 billion in total contract awards during the quarter.
• Federal Solutions Book-to-Bill Ratio -- 1.2x, driven by contract awards that increased 53% year over year.
• Operating Cash Flow -- $269 million, which significantly exceeded the company's prior commitments.
• Fiscal Year 2026 Revenue Guidance -- $6.25 billion to $6.45 billion, narrowed from the previous range based on year-to-date performance.
• Fiscal Year 2026 Adjusted EBITDA Guidance -- $510 million to $515 million, reflecting enhanced operational visibility.
• Fiscal Year 2026 Operating Cash Flow Guidance -- $430 million to $490 million, maintained due to the uncertain geopolitical environment.
• U.S. Cyber Command OTA Ceiling -- $750 million, an increase following the acquisition of SealingTech and the start of full-rate production for the Joint Cyber Hunt Kit.
• MDA TEAMS-Next Booking -- $234 million, representing a portion of a two-year option period for engineering and technical support for missile defense systems.
• Pacific Command OTA Ceiling -- $95 million, a classified three-year agreement to provide national security solutions in the Pacific theater.
• U.S. Space Command OTA Award -- $86 million, a 75-month agreement for program and construction management support for the new headquarters at Redstone Arsenal.
• Product Revenue -- $350 million annually, with management focusing on expansion across six product families including biometrics and autonomy.
• Capital Expenditures -- $18 million, with expected sequential increases to support classified facilities and enterprise systems upgrades.
• Net Debt Leverage Ratio -- 2.1x, maintaining a strong balance sheet for selective accretive acquisitions.
• Share Repurchases -- $110 million year to date, an increase of nearly 70% from the prior year period.
• Net Income -- $54 million, a 16% decrease attributed to higher transaction-related expenses.

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RISKS

• Smith stated that "we currently have $850 million awarded to Parsons over a 5-year period that's under protest and another $495 million that's still in the protest period," highlighting potential delays in converting awards to revenue.
• Smith warned that the Canada joint venture project "remains exposed to factors outside of our control such as weather, potential contract modifications and being the non-managing joint venture partner," which could impact cost and schedule estimates.
• Ofilos noted that "while Q3 cash flow was strong, we are maintaining our operating cash flow guidance range... due to the uncertain geopolitical environment," specifically citing volatility in the Middle East.

SUMMARY

Parsons Corporation (NYSE:PSN) reported record quarterly profitability and margin expansion driven by sustained demand in the federal solutions and critical infrastructure sectors. Management reported that the company achieved a record total backlog of $9.4 billion and a funded backlog of $6.8 billion, providing a foundation for sustained organic growth. The company is strategically shifting its portfolio toward higher-growth, higher-margin opportunities, including the divestiture of remote location contracts and the expansion of its product-based revenue. While navigating procurement delays and geopolitical uncertainty in the Middle East, management confirmed it remains focused on executing its long-term growth objectives through 2028.

• CEO Smith stated that the company expects product revenue to grow between 20% to 30% in 2027, driven by the ramp-up of the Joint Cyber Hunt Kit and situational awareness systems.
• Management noted that only 48% of the funding from the Infrastructure Investment and Jobs Act had been spent as of August 2026, indicating a multiyear demand tailwind for North American infrastructure projects.
• The company announced that Matt Ofilos will step down as Chief Financial Officer effective Nov. 6, 2026, with Director George Ball appointed as the interim replacement to ensure continuity.
• CEO Smith reported that the Middle East net headcount has increased every month in 2026, reflecting the resilience of the regional market despite ongoing geopolitical uncertainty.
• The company is expanding its use of Other Transaction Agreements, with a pipeline totaling approximately $2 billion for missions including cyber, space, and missile defense.

INDUSTRY GLOSSARY

• C5ISR: An acronym for Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance, and Reconnaissance.
• Joint Cyber Hunt Kit (JCHK): A modular, mobile cybersecurity system used by defense teams to detect and counter threats across allied networks.
• Other Transaction Agreement (OTA): A flexible contracting vehicle used by U.S. government agencies to accelerate the development and prototyping of new technologies.
• Indo-PACOM: The United States Indo-Pacific Command, a combatant command responsible for the Indo-Pacific region.
• Book-to-bill ratio: The ratio of orders received to revenue earned; a ratio above 1.0 indicates strong future growth potential.
• DSO (Days Sales Outstanding): A measure of the average time it takes a company to collect payment after a sale.
• IDIQ (Indefinite Delivery/Indefinite Quantity): A type of contract that provides for an indefinite quantity of services during a fixed period of time.
• Missile Defense Agency (MDA): The U.S. government agency responsible for developing a layered defense against ballistic missiles.

Full Conference Call Transcript

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

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

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

We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. I now will turn the call over to Carey.

Carey Smith: Thank you, Dave, and welcome to Parson's Third Quarter 2026 Earnings Call. I'd like to begin by recognizing Parsons' more than 21,000 employees for their dedication and professionalism. Their continued focus on our customers' missions enabled us to deliver results that exceeded our third quarter commitments. We also remain deeply focused on the safety and security of our 8,000 employees across the Middle East. Their resilience and commitment have allowed us to maintain strong execution across the region and continue delivering for our customers. This quarter, we delivered on our financial and strategic objectives through disciplined execution. Revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow all exceeded our commitments.

Demand remained healthy across both Federal Solutions and Critical infrastructure despite a challenging macroeconomic backdrop. These results, combined with our strong bookings, a growing backlog and robust pipeline demonstrate the resilience of our portfolio and provide a solid foundation for enduring organic growth. Building on this momentum, we continue to advance our strategic portfolio initiatives and drive operational excellence. We cited a definitive purchase agreement for the divestiture of our remote location contracts and are finalizing approval of the related contract novation. This transaction further derisks our portfolio and enables us to focus our resources on higher growth, higher-margin opportunities. Our Critical Infrastructure joint venture program is now more than 75% complete.

We expect to reach over 80% by year-end and 85% at the end of the first quarter of 2027. We've increased executive oversight, strength and review frequency and initiated critical testing and commissioning activities to manage remaining cost and schedule risk. While the project remains exposed to factors outside of our control such as weather, potential contract modifications and being the non-managing joint venture partner, we remain focused on disciplined execution in line with our current estimates. As a reminder, we have not pursued similar consortium projects since 2019. Before we review our financial and operational highlights for the quarter, I want to address the leadership transition we announced earlier today.

As noted in our 8-K filing, Matt Ofilos has decided to step down as Chief Financial Officer to pursue a new professional opportunity. On behalf of the Board and the entire Parsons team, I want to thank Matt for his dedicated leadership and financial stewardship over the past 5 years. We wish him the best in his next chapter. To ensure a seamless transition, George Ball will be stepping into the interim CFO role effective November 6. George brings decades of experience with Parsons Corporation, including 13 years as the Parsons CFO. Since retiring, George has been serving on our Board of Directors and has deep familiarity with the company, immediate operational readiness and our proven track record.

George's extensive experience and thorough institutional knowledge will ensure continuity and a seamless transition during this period. Turning to our third quarter financial results. Total revenue increased 2% year-over-year. Excluding our confidential contract, revenue increased 5%, with 2% organic growth. Adjusted EBITDA increased 6% and adjusted EBITDA margin expanded 40 basis points to 10.2%, a company record. Operating cash flow was $269 million, significantly exceeding our commitments. Critical Infrastructure delivered record third quarter revenue and adjusted EBITDA margin, which exceeded 11% for the first time. Bookings were also strong. Total contract awards increased 14% year-over-year, resulting in a consolidated book-to-bill ratio of 1.1x. Federal Solutions was particularly strong, with awards increasing 53% year-over-year and a book-to-bill ratio of 1.2x.

Critical Infrastructure delivered a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above that level. Through the first 9 months of 2026, Federal Solutions bookings increased 47% year-over-year, while Critical Infrastructure achieved a year-to-date book-to-bill ratio of 1.1x. As a result, consolidated year-to-date book-to-bill was 1.2x. The quality and strategic importance in these awards were equally encouraging. During the quarter, we received three contract actions valued at more than $100 million each and continue to expand our use of other transaction agreements or OTAs. We won a $495 million ceiling value contract for a national security customer to acquire and deploy advanced communications, power and software capabilities.

We booked $37 million on this contract in the third quarter. One of the quarter's most significant awards was the increase of the ceiling value of our 5-year sole-source other transaction production contract with United States Cyber Command to $750 million. We secured this contract through our acquisition of SealingTech and have now begun full rate production of the Joint Cyber Hunt Kit or JCHK. JCHK is a modular mobile cybersecurity system that enables joint cyber protection teams to rapidly detect, analyze and counter advanced cyber threats across the United States and Allied Networks. To date, we've booked $250 million under this contract including JCHK.

Parsons now generates approximately $350 million annually in products and related service revenue, and we plan to continue to expand this portfolio across six product families. Biometrics and identity management, full spectrum warfare, command and control, mission planning, autonomy and counter unmanned aircraft systems, space mission systems and infrastructure operations and resilience. In addition, this quarter, we booked $234 million of the $514 million, 2-year option period for the Missile Defense Agency's TEAMS-Next program. Under this program, we will continue providing engineering, technical, analytical and oversight support for the nation's integrated missile defense system, including efforts to address evolving ballistic missiles and hypersonic threats.

We also won four new OTA awards with an aggregate ceiling value of more than $370 million and booked approximately $140 million under these agreements during the quarter. These awards include a 5-year $97 million OTA by a government customer to deliver technology to simulate radio frequency and cyber conditions. The company booked $4 million on this agreement during the quarter. We also received a 5-year $95 million other transaction agreement from a government customer to modernize software supporting early-warning capabilities, and we booked $19 million in this agreement during the quarter. In addition, we were awarded a classified 3-year agreement with a $95 million ceiling to provide advanced national security solution, supporting operations in the Pacific theater.

We've booked $30 million on this agreement in Q3. We won a 75-month $85 million agreement to provide program and construction management support for the United States Space Command's new headquarters at Redstone Arsenal in Alabama. We booked the full value of this agreement. Collectively, these wins expand our presence across several strategic growth markets. The United States Space Command award also demonstrates the synergies between our Federal Solutions and Critical Infrastructure segments and highlights our continued growth in defense infrastructure. OTAs provide customers with a flexible path from technology development and prototyping through production and deployment. They're particularly well suited for critical missions such as cyber, counter unmanned aircraft systems, electronic warfare and space and missile defense.

We currently have 26 OTA contracts, including 12 awarded this year, representing $1.6 billion in total ceiling value. Our OTA pipeline totals approximately $2 billion, positioning us to continue expanding this important contracting vehicle. Today's defense environment is faster, more distributed, more contested and increasingly multi-domain. Meeting these challenges require solutions that are high-performing, affordable, rapidly deployable and scalable for sustained operations. Our purpose-built Federal Solutions portfolio is differentiated by the combination of speed, agility, affordability and mission reliability. We bring together proven hardware, mission software and secure deployment to deliver integrated systems that create measurable advantages for our customers.

The administration's proposed FY '27 base defense budget of $1.15 trillion represents an increase of more than 28% over fiscal year '26 and aligns closely with Parsons differentiated capabilities and customer relationships. While the proposed budget remains subject to congressional approval and appropriations, its focus on missile defense, cyber, space, electronic warfare and industrial-based modernization reinforces our confidence in the long-term demand environment. With strong bookings and a strong pipeline, we believe Parsons is well positioned to support national security priorities and deliver capabilities at the speed and agility required by the Department of War. Funding decisions, protests and procurement may affect revenue conversion, but we view those as timing considerations rather than indicators of demand.

We also expect growth as existing vehicles are funded and as classified capabilities, recently awarded programs and new products ramp. The same principles extend across Critical Infrastructure. Infrastructure owners are seeking assets that are more resilient, connected and intelligent and they need partners who can help them navigate the full life cycle from planning and design through construction, operations and optimization. Parsons combines deep infrastructure expertise with digital engineering, data analytics, and secure technology to transform complex systems into higher performing, more resilient assets. By connecting physical infrastructure with digital intelligence, we help customers make better decisions, improve performance and create measurable value.

Demand remains healthy across our Critical Infrastructure segment in both North America and the Middle East and this is reflected in the segment's 24th consecutive quarter with a book-to-bill ratio of at least 1.0x. In North America, demand remains strong across transportation, environmental and water and wastewater projects. Only 48% of the Infrastructure Investment and Jobs Act funding has been spent as of August 2026 and the proposed Build America 250 Act would authorize at least $580 billion of surface transportation funding through 2031, if enacted. This includes historic bridge investments, permitting reforms and increased formula-based funding to 90%.

The Middle East also remains a resilient and attractive long-term growth market, supported by investment in transportation, urban development, aviation modernization, major regional events and broader economic transformation. We also see emerging opportunities in the Middle East and counter unmanned air system, cyber defense, integrated air and missile defense, desalination and the protection of Critical Infrastructure. Our Middle East net-net headcount has increased every month in 2026. These trends reflect our continued investment in the region, the strength of our brand and our confidence and long-term growth prospects. While the infrastructure market remains attractive, recent growth has been moderated due to lower pass-through revenue in North America and broader geopolitical uncertainty.

In summary, we believe the third quarter demonstrated the strength and differentiation of our portfolio. We exceeded our commitments for revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow while strong book-to-bill ratios and healthy demand reinforced the resilience of both segments. Combined with our greater than $50 billion pipeline, strong win rates, total backlog of $9.4 billion, of which 73% is funded and $12 billion of awarded contracts not yet booked. We believe these results provide us with a solid foundation for attractive long-term organic growth and value creation for our shareholders. With that, I'll turn the call over to Matt to provide more details on our third quarter financial results. Matt?

Matt Ofilos: Thank you, Carey. Serving as a Parsons' CFO under your leadership has been an incredible privilege. I'm proud of all that our team has accomplished and have tremendous confidence in the company's future. I'll remain a committed Parsons supporter for years to come. With that, let me get into the details of the Q3 results. Third quarter was highlighted by exceeding our prior commitments and delivering solid performance across the company. We will continue to focus on disciplined execution to drive long-term growth and shareholder value.

With book-to-bill ratios at or above 1.0x in both segments for the third consecutive quarter, revenue growth of 5%, excluding the confidential contract, a record third quarter adjusted EBITDA margin of 10.2% and operating cash flow of $269 million. We believe the strength of the portfolio will continue to drive long-term growth and margin expansion. Turning to the details of our third quarter results. Total revenue grew 5% and 2% on an organic basis, excluding the confidential contract. These increases were driven by growth in our cyber and electronic warfare and transportation markets. Highlights included strong growth on new and existing contracts to include JCHK, classified identity management contract and our FAA work.

Total revenue, including the confidential contract increased 2% from the prior year period and was down 1% on an organic basis. We anticipate accelerating Federal Solutions growth over the next several quarters, supported by strong book-to-bill ratios over the past 3 quarters and the expected resolution of over $850 million in contract wins that are currently under protest. SG&A expenses for the third quarter increased 10% from the prior year period, primarily driven by acquisitions and technology investments that are in line with expectations. Record adjusted EBITDA of $168 million increased 6% from the prior year period. Adjusted EBITDA margin expanded 40 basis points to a record 10.2%.

These increases were driven by accretive growth across both our Infrastructure and Federal segments. I'll now turn to our operating segments, beginning with Critical Infrastructure. Record third quarter revenue of $846 million increased 2% year-over-year, driven by 1% organic growth and contributions from our Applied Sciences acquisition. Organic growth includes strength in our transportation market and growth in the Middle East despite the ongoing geopolitical uncertainty. Adjusted EBITDA increased 9% year-over-year to $94 million, while adjusted EBITDA margin expanded 80 basis points to 11.1%. Revenue, adjusted EBITDA and adjusted EBITDA margin all set new records for the segment reflecting the ramp-up of recent awards, contributions from accretive acquisitions and stronger program execution.

Moving to our Federal Solutions segment, where third quarter revenue, excluding the confidential contract increased 9% year-over-year and 3% on an organic basis. Growth was driven by strength across our cyber and electronic warfare and transportation markets including the confidential contract, total segment revenue increased 2% year-over-year and declined 3% organically. Federal Solutions adjusted EBITDA increased 2% year-over-year, while adjusted EBITDA margin remained unchanged at 9.2%. The increase in adjusted EBITDA was primarily driven by contributions from acquisitions and growth on accretive contracts. Next, I'll discuss cash flow and balance sheet metrics.

Our net DSO at the end of Q3 was 70 days, 8 days above the prior year period, mainly due to the conclusion of our confidential contract in Q1 of 2026. Compared to Q2 2026, our DSO improved by 6 days on strong cash collections. During Q3, we generated $269 million of operating cash flow compared with $163 million in the third quarter of 2025. On a trailing 12-month basis, we generated $490 million in operating cash flow an increase of 12% over the prior 12-month period. These increases were driven primarily by strong collections across the entire portfolio. Capital expenditures totaled $18 million in the third quarter.

Looking ahead from the fourth quarter, we expect CapEx to increase sequentially as we continue to invest in classified facilities and reach critical milestones related to enterprise systems upgrades that support Parsons long-term growth and enhanced efficiency across the business. Trailing 12-month free cash flow conversion was 130%. Our balance sheet remains strong as we ended the third quarter with a net debt leverage ratio of 2.1x. During the third quarter, we repurchased 1.3 million shares for $60 million. Year-to-date, share repurchases have totaled $110 million, an increase of nearly 70% from the prior year period. We have increased share repurchases given our view that the current stock price does not fully reflect Parsons' long-term value.

We also continue to invest organically to differentiate our capabilities and we'll selectively pursue accretive acquisitions that strengthen our win rates and ability to capture large programs through differentiated technology. Turning next to bookings. We secured $1.8 billion in contract awards during the third quarter, an increase of 14% year-over-year. This resulted in a consolidated book-to-bill ratio of 1.1x for the quarter. Our book-to-bill ratio was 1.2x for the first 9 months of the year and 1.1x on a trailing 12-month basis, supporting our future growth outlook as recently awarded programs ramp. Both segments delivered solid bookings. Critical Infrastructure achieved a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above 1.0.

In Federal Solutions, contract awards increased 53% year-over-year resulting in a book-to-bill ratio of 1.2x for both the third quarter and on a trailing 12-month basis. At the end of the third quarter, total backlog reached a record $9.4 billion, up 6% year-over-year, while funded backlog was up 7% and reached a record $6.8 billion, representing 73% of total backlog funded. Now let's turn to our guidance. Based on our year-to-date performance and enhanced operational visibility, we are narrowing our revenue and adjusted EBITDA guidance ranges provided on July 29. For fiscal year 2026, we now expect revenue in the range of $6.25 billion to $6.45 billion and adjusted EBITDA between $510 million and $515 million.

While Q3 cash flow was strong, we are maintaining our operating cash flow guidance range of $430 million to $490 million due to the uncertain geopolitical environment. These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website. Slide 12 of the presentation provides additional key assumptions that support the midpoints of our 2026 guidance ranges, which we believe remain the appropriate basis for modeling our full year results. In summary, our third quarter results reflected solid performance across our portfolio, including book-to-bill ratios at or above 1.0x in both segments, record profitability and healthy cash generation.

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

Carey Smith: Thank you, Matt. This quarter, we exceeded all of our financial commitments delivering record profitability, excellent cash generation, strong bookings, a record total and funded backlog while expanding our products and other transaction agreement portfolio and strategically repositioning the business towards higher growth, higher margin work. As we look ahead, our priorities are clear, consistent execution in converting our strong pipeline at recent awards and a profitable growth. While we continue to navigate procurement timing and geopolitical uncertainty, the alignment of our capabilities with our customers' most critical national security and infrastructure needs and demand for our differentiated solutions supports our confidence in Parsons' long-term outlook.

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

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

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

Carey Smith: Yes. Thanks, Sheila. So I'd say we're very positive on FS growth. When you look at the book-to-bill, as you pointed out, year-to-date, it's very strong at 1.3x. We've been awarded over 12 different contract actions, greater than $100 million since the start of the year. The majority of those have been in federal. And in addition to what we talked about as far as the wins, we currently have $850 million awarded to Parsons over a 5-year period that's under protest and another $495 million that's still in the protest period. So the Federal group definitely has some momentum behind it and funded backlog is significantly up for Federal.

The goal now is really how quickly we can convert those awards into revenue, and that's where we're laser-focused.

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

Carey Smith: Yes. So as far as programs that are driving the growth, I would say all the recent new wins, the classified biometrics identity win all the other transaction awards that we've received, which include programs that are basically already full of work like Joint Cyber Hunt Kit at $750 million or the Space Command headquarters new award. So those would be some of the key FAA continues to be very strong. We're up 40% year-over-year in FAA, and we see that effort continuing as we go into next year and the Air Base Air Defense as well as additional point defense activities remain very strong.

We're also doing well on our Defense Threat Reduction Agency CTRIC contract being the #1 awardee there and Department of Energy Counternuclear smuggling and deterrence we're the #1 award there. So a lot of trajectory in the federal area. As you're aware, we haven't yet provided formal 2027 guidance. As we look to 2027, we're very confident in the strength of our record backlog. We have $12 billion of awarded contracts to Parsons that we have not yet reflected in bookings and more than $50 billion of our qualified pipeline with over 109 opportunities, greater than the $100 million that are in that pipeline.

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

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

Operator: Our next question in queue coming from John Godyn with Citi.

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

Matt Ofilos: Yes. Thanks, John. I'll take that one. I'll probably go on the first order. On the cash flow, to your point, we had an exceptional quarter in Q3. I think we see the opportunity to continue to deliver cash levels at similar levels. However, given the uncertainty, specifically in the Middle East, we've been a bit more conservative on the forecasting there and giving ourselves a little bit more wiggle room at the midpoint. So I'd say on the cash side, probably some opportunity trending between midpoint and higher end on the cash. Revenue, really strong quarter. Again, kind of derisked Q4.

We see a little bit of a decel in Q4 from Q3 but mainly that's the seasonality on programs like FAA and some of the Canada Line jobs and access there. So if things like protests unwind earlier, we have no revenue in from kind of new, new and the protest on line. So the tailwinds or trending toward the higher end of guide would be on protest and continued performance similar to what we had in Q3 on the revenue side. On EBITDA, I think you'll see with Q3's performance, it's kind of a flat Q3 to Q4. So obviously, risks and opportunities to EBITDA are always performance related and operational.

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

John Godyn: Got it. Very helpful. And in the slides, there was this note about strong contract win rates. Clearly, you guys are producing some wins. We don't have perfect clarity into what the funnel looks like and how much you're out there bidding. Carey, I think in the last question, you mentioned a very large qualified pipeline. Can you just plug us into the funnel here and how you're kind of thinking through the funnel as we go into 2027?

Carey Smith: Yes. So we expect this year, we're going to bid roughly the same amount as we did last year. So on the order of about $19 billion of proposals submitted and again, I'll highlight that our pipeline has been greater than $50 billion for 11 consecutive quarters, so very strong pipeline. 109 opportunities greater than $100 million. So strong funnel. If you look at the pipeline, it's broken up about $30 billion of that comes from Federal with about $23 million from Critical Infrastructure.

Matt Ofilos: And John, just two things I would add that Carey mentioned earlier, the North of $12 billion, that's the highest level it's been since 2024, which is a really good sign. Obviously, those things are easy to turn into backlog quicker than kind of new, new pursuits. And then on top of that, we have just about $5 billion awaiting notice of award.

Operator: Our next question coming from the line of Gautam Khanna with TD Securities.

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

Carey Smith: Yes. Great question, Gautam. As I mentioned on the call, the project is over 75% complete as of today. And we expect to be 80% by year-end, 85% by the end of the first quarter. One thing that we did throughout the quarter since June when we had in June and July, the historic rainfall to mitigate the weather risks, we resequenced the work so that we prioritized all the critical activities before the end of this year, and we move work to the right that could be performed during the winter months. We're also working with customer on requested relief for historical weather and other events. And that's not included in our forecasted final completion date of June 2028.

If that schedule were to extend beyond June 2028 or other risks would materialize there could be additional costs or joint venture investment required. But as you point out, as the project advances and nears completion, we expect the nature and the potential impact of those remaining issues to be less significant than what we experienced historically. As a reminder, this 50-50 joint venture project, we're the non-managing partner and we have not pursued any similar consortium projects since 2019.

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

Carey Smith: No.

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

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

Operator: Our next question in queue coming from the line of Jonathan Siegmann with Stifel.

Jonathan Siegmann: Best wishes, Matt. I appreciate you guys qualifying product revenue base today. I was just -- can you frame how we should think about the margin difference between products and those services relative to the base federal solutions. And then you had previously mentioned over 30% growth for Cyber Hunt. Is that specific to that product line or that products broadly? Just trying to gauge how much faster that vertical could grow relative to the base.

Carey Smith: Yes. I'll start off on the growth. So as we mentioned and then Matt will hit the margin, we have $350 million of products and related services in 2026 and we're expecting an increase of between 20% to 30% of our overall products as we go into 2027. That's based on Joint Cyber Hunt Kit, but also other products, including our TReX threat emulation system, our Assured Positioning, Navigation and Timing system, our Command and Control Core system, our biometrics and identity management as well as our -- some of our RF capabilities and our TAK situational awareness system and some of our space products and our intelligent network products. So quite a robust products portfolio.

Matt Ofilos: Yes. John, relative to margin, I'd say it obviously ranges, I would say, I'll talk generally about products. But I'd say a lot of the product revenue we have today, JCHK specifically was going through LRIP and some of the other programs are still kind of early investment and growing. So I would say we expect margins on products in general to be north of 20%. Some of the bigger ones will be right around that 20%, but others are even kind of in the 40% range. So if you think about products as a whole 2x what let's call it kind of high 9 or mid- to high 9 that Fed should be -- that's probably a good target.

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

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

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

Carey Smith: Yes. What we did, Gavin, is because we had the historic rainfall in June and July, we decided to resequence the work and that it would be better that we could get to an earlier testing and commissioning phase. So it was intentionally moving work around to optimize resources. By doing that, that enabled us to reduce our cost and reduce some headcount this year so that we can surge it after the new year.

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

Carey Smith: Yes. So we have had progress. Again, I'll point out two of them are kind of fully scoped from the beginning, which are two of the bigger OTAs. That would be the Joint Cyber Hunt kit where there's a requirement to deliver approximately 74 kits per year for 3 years. And then the Space Command headquarters, which we fully booked and is fully ramped. So those two make up a good portion of what we've already booked. And then we have the OTAs that we announced last year, we've already started to receive funding on those.

The good news is the scope that we're doing on the majority of the OTAs is focused on the Indo-PACOM region, the near peer fight, cyber space, missile defense, electronic warfare, all areas that are in heavy demand by the department of War as well as the intelligence community.

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

Andrew J. Wittmann: All right. Matt, we'll miss you, George, welcome back. Glad to have you. I guess I'm going to ask one of the first questions here on the CI segment. I just -- the organic growth rates here have been kind of low -- the change over the last quarter here is around the Middle East. Last quarter, the Middle East was pretty good, even though some of the turbulence is already affecting the region this quarter, a little bit of a decel. So I just -- Carey, I was hoping you could maybe address what you saw in the quarter and how that bodes for the future. Obviously, there's tons of uncertainty here.

But I just wanted to kind of think about it like you're thinking about it. And even in North America here, we've been seeing kind of across the board some deceleration in some of the organic growth rates for not just your company but for peers as well. Just want to make sure we're thinking about what the realistic organic growth rates for that business are. Obviously, you're going to point to the backlog, and that's been pretty consistent here. But just want to try to think about like that, what you're seeing there and think about it like you're thinking about it, please?

Carey Smith: Yes, sure. Thanks, Andy. So again, we've had greater than 24 consecutive quarters greater than 1.0 book-to-bill, which reflects very strongly on the demand for both the Middle East as well as for North America. During the quarter, there was some slow in Saudi, which makes up 65% of our Middle East business and that was due to a rephasing of programs by the public investment funds. So you can think about that as timing as well as award timings. So their focus right now is on any program that is based around Riyadh, so that they can get to the Expo and the World Cup events in 2030 and 2034.

So this quarter, while we were at 0.8 book-to-bill for the Middle East, we are -- believe we're going to exceed 1.0 back for Q4 and the reason is that in Q4, we get our annual renewals on our large programs, such as Jazan and Yanbu, as an example. In the Middle East, we're very happy. Last week, we had record billable hours, and we've had, as I mentioned on the call, an increase in net headcount every single month throughout 2026. So demand remains strong. I think there are some timing issues that are happening in Saudi Arabia.

On the other side, again, of the conflict, though, we do see opportunities to include areas like rebuild, how do you possibly and actively protect various assets like data centers, utilities and water. So in addition to our kind of our core Critical Infrastructure business, we see some expansion opportunities into new market areas. In North America, if you take out lower pass-through, we mentioned that some of our larger design programs had peaked, which includes Hawaii Rail and Transit, the Newark AirTrain program and the Georgia State Route 400, those had a lot of pass-through.

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

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

Matt Ofilos: Yes. No, there's nothing really there, Andy. Just kind of trying to be thoughtful and look forward to potentially outperforming, but obviously, a lot of volatility given the media environment in different places. So I have high confidence in the midpoint and really just want to get back to that beat mode.

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

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

Carey Smith: Yes. Thanks, Tobey. So we're excited about other transaction agreements. We have a nontraditional company that we've kept in place since we bought Polaris Alpha back in May of 2019. We've been awarded 26 OTAs, I mentioned, for $1.6 billion in value. We have a pipeline of over $2 billion in OTAs. They offer a lot of advantages over traditional federal contracts in terms of the flexibility you can tailor the terms to the project. It provides access to innovation. You could do a lot faster prototyping. It's quicker from bid to award timing. You negotiate intellectual property terms.

You can do more collaboration with consortium public-private partnerships, you have flexible payment, lower administrative burden and you can also have a production transition is what we've illustrated with the Joint Cyber Hunt Kit. We do like OTAs, they have a defined scope and stated technical objective and are tied to customer mission requirements, which all of our OTA awards have been. The other advantage to your point on margin is most of these are at fixed price. So we do believe that we'll -- these will be margin accretive to our business.

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

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

Matthew Akers: Yes. Matt, best of luck, been nice working with you. I wanted to follow up on just the Critical Infrastructure margins, really strong in the quarter. Anything sort of unusual that drove that and just your level of confidence to be able to continue to expand margins with that segment?

Matt Ofilos: Yes, Akers, I think to your point, 11-plus percent margin. The only thing I would tell you is pass-through. So you'll recall from the last quarter, we lowered revenue guide for the year by about $50 million through the first half -- with specific to pass-throughs. So through the first half of the year, we had been down about $25 million. So we assumed a similar trend in the second half. What we saw in Q3 was about $19 million lower pass-through year-over-year. So we do see -- we do get the benefit on the pure margin rate. I was excited to see that EBITDA dollars were up 9% year-over-year. So business continues to deliver and deliver on the earnings.

And so the pass-through dollars, while it looks a little bit worse on the revenue side, it does benefit the EBITDA dollars and margin rate. So nothing particular. It's just the underlying execution of the business and then the mix.

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

Carey Smith: Yes, I'll start, Matt will jump in. Yes, we're very happy with 73% funded backlog. I think it's 2x to 3x most of our peers. So I view that as a good sign again as you start to think about how quickly you can convert awards into revenue.

Matt Ofilos: Yes. The only thing I'd say, Matt, is typically we watch funded because it's more likely to convert to revenue quicker than just total backlog and so funded is obviously evidence of the next 12 to 18 months. And so positive trends in funding should support the growth outlook.

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

Bryce Sandberg: Carey, Matt, George and Dave, and Matt, best of luck in your next role. Last quarter, you talked about a second half margin of 9.4% in Federal. It came in at 9.2% this quarter. Can you just talk about the puts and takes there? And what's assumed in the guide for the fourth quarter?

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

Carey Smith: And also, I'd say just a little less seasonal because FAA, which cost reimbursable tends to be seasonal and is not as high in the fourth quarter. And that's cost plus.

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

Carey Smith: Yes. So first, I'd say we're very fortunate that we have the 73% funded backlog record of $9.4 billion and $12 billion that's been awarded to Parsons, but not yet booked because we can run for a long time under a CR. Unfortunately, we've become very used to dealing with CRs. There's definitely still some uncertainty around the FY '27 appropriation to process the NDAA potential supplemental legislations and the next steps that will follow the current continuing resolution. The current CR funds government through December 11. And if there's not -- if that's not passed, new CR, you could potentially have a shutdown, which we don't think either party is really going to want to have.

But I think the key for us is we're not highly dependent on new budget because of the wins that we've had, 12 contract actions greater than $100 million since the first of the year. Our federal business is anchored by very large multiyear contracts and single award IDIQ and OTA vehicles, such as missile defense agency, the FAA and a lot of work we do with the GSA FEDSIM, and once again, substantial backlog awarded not booked in a large qualified pipeline.

Operator: Our next question coming from the line of Gautam Khanna with Securities.

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

Carey Smith: So I would say based on the awards that we've had. We anticipate that Federal would grow faster than Critical Infrastructure in 2027. First half, second half, I don't -- can't think of any dynamic.

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

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

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

Matt Ofilos: Appreciate it, Noah.

Noah Poponak: Can you guys talk a little bit about capital deployment. You've been buying -- you've bought back some stock in the last few quarters, paid down some debt. I know you're always looking at acquisitions and net debt to EBITDA isn't super high, but it's higher than your historical average. So should I read all of that as the M&A pipeline is a little slower? Or is that not the case? What are you seeing on that front?

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

Noah Poponak: Okay. And Carey, just to the questions you've had on top line growth moving forward? I guess if Federal Solutions is faster next year, I guess I was wondering what the first quarter is that, that moves to positive year-over-year growth. Just when you're fully clear of all the moving pieces you've had in the baseline compare in that segment? And then on CI, I mean, is there a way to frame how you see the next 3 to 5 years compared to the 3- to 5-year run you had post pandemic?

Carey Smith: Yes, let me start and then Matt can jump in. For CI for the next 3 to 5 years, we still view a favorable environment. The Middle East, we've got growth prospects, not just in our Critical Infrastructure business, urban development and transportation, but we've moved into tourism and hospitality, and defense and security, which obviously have become increasingly important. And then we see opportunities as far as rebuild. In North America, with the Build America 250 Act that basically set the floor at $580 billion. Importantly, within that next 5-year surface transportation bill, there's historic investment in bridges. Parsons has done over 4,500 bridge projects.

So once again, very well aligned to our capabilities and roads and highways are also focused. We've designed and built over 10,000 miles roads and highways on 6 continents, another very strong core competency for the company and there's a push towards digital transformation, where we're uniquely positioned with our portfolio because we can bring capabilities like artificial intelligence, cybersecurity protection, digital twins because we have all those technologies across our business, particularly driven from the Federal side. As far as Federal and the confidential program pretty much the lapping will end at the end of this year. We only have about $15 million that would go into next year that would be overlap.

Matt Ofilos: Yes. No, specifically in Q3, we had just under a $50 million headwind from the confidential contract in Q4, it's $23 million, and then Q1 will be $15 million. So Q4 will likely be closer to flattish, organic. We have a little bit of seasonality with FAA and different things in Fed. So it's somewhere around there. And then Q1 with the lower comp, it should be a positive growth.

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

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

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

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