Parsons Corporation (PSN) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Parsons Corporation Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Dave Spille, VP, Investor Relations. Sir, you may begin.

Thank you. Good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 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 fourth 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 will be described in our Form 10-K for fiscal year ended December 31, 2019 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 now will turn the call over to Chuck.

Thank you, Dave. Welcome to Parsons’ fourth quarter and fiscal year 2019 earnings call. We had a strong finish to 2019, and we ended the year with record revenue, record profitability, and generated solid cash flow in the second half of the year. We continued to deliver on the plan we outlined in our IPO. Our Federal Solutions business achieved strong organic revenue growth and we produced significant margin expansion across the enterprise. We also invested in our people and our technology and leveraged our strong balance sheet to complete two strategic acquisitions during the year. Our strong sales performance resulted in growth of our backlog from last year and resulted in a trailing 12-month book-to-bill ratio of 1.1. We also reduced our net debt to a trailing 12-month adjusted EBITDA leverage ratio of 0.2 times. Finally, our employees continued to exemplify their passion for delivering a better world. Our teams contributed time and resources to various environmental, social, and governance initiatives. In terms of our fourth quarter financial results, we delivered revenue growth of 12%. This includes 14% organic growth in Federal Solutions; adjusted EBITDA growth of 62%, a 260 basis point improvement on our adjusted EBITDA margin to 8.5%, which was driven by strong margins in both business segments; a trailing 12-month book-to-bill ratio of 1.1, which was driven by 1.3 in Federal Solutions; and with this strong performance, Federal Solutions now represents 48% of Parsons’ revenue, up from 43% in the same quarter of last year. Our winning business momentum continues. We reported strong organic revenue growth, driven by solid program execution. Recent acquisitions further contributed to this growth. Simultaneously, we increased our adjusted EBITDA margin by over 200 basis points in each segment during the fourth quarter. The margin expansion was facilitated by five factors: selling more software and hardware products, acquiring higher-margin businesses, reshaping our portfolio as we continue to run off lower-margin pass-through revenue, bidding on higher-margin pursuits, and effectively managing our cost structure. Regarding sales in our Federal Solutions business, we continue to perform extremely well. Our segment win rate for fiscal year 2019 was approximately 50%. Our cyber and intelligence business led the corporation with new and recompete win rates of 90% and 100%, respectively. This continues our robust growth in the rapidly expanding high-margin cyber market. And just one quarter after winning the largest cyber contract in our history, we were awarded four new strategic cyber contracts, including a $90 million win with a classified customer. We also had large strategic contract wins within our Critical Infrastructure business. We were awarded two large joint venture projects in the fourth quarter, which Carey will discuss in a few minutes. As I mentioned previously, in fiscal year 2019, we successfully executed the strategy we outlined in our IPO. Our objective was to deliver strong organic growth in our Federal Solutions business, and we achieved organic growth of greater than 6% for the full year. In terms of our strategy to deliver material margin expansion across our enterprise, we achieved 130 basis point expansion in 2019. This was driven by 160 basis point increase in Critical Infrastructure, and a 70 basis point increase in Federal Solutions. Our strategy also acknowledges that our most important assets are our people and our technology. We further invested in both our people and technology in 2019. As examples, we increased our research and development budget in 2019 and plan to approximately double that investment again in 2020. We also continue to invest in our benefits, retirement plans, facilities and training and development programs to ensure we attract and retain the very best talent. We’ve also executed on our plan to leverage our strong balance sheet. In 2019, we completed two key acquisitions that met our three key strategic priorities. They provided technology solutions in our focus areas and core markets. They expanded our customer base and they augmented our sales differentiation that led to increased win rates and our ability to prime larger contracts. Lastly, on the strategic front, M&A will continue to be a significant part of our growth. We will leverage targeted M&A to augment organic operations in three key areas: enhance our existing business, extending us into new markets, and transforming Parsons by building our technology and transactional product revenue streams. This transformation, already under way, will augment our services business with software and hardware products that are scalable and bring comprehensive solutions to new and existing customers. As we stated before, we focus on solving our customers’ most vexing mission challenges. In addition to this mission-critical work we perform for our customers, I’m extremely proud of our contributions to deliver a better world. As an example, during 2019, our employee team members built pedestrian bridges in both South America and Africa. These bridges were needed to connect isolated communities to education, food supplies, medical services, and economic opportunities. Our employees also participated in community service events that benefited organizations, such as The Tragedy Assistance Program for Survivors, or TAPS; the Special Operations Warrior Foundation; and Girls Lead the Way. Parsons also awarded scholarships to high school STEM students for developing innovative next-generation ideas, all consistent with our corporate purpose to deliver a better world. Core values define who we are as a company, and 2019 was a year highlighted with numerous awards for our safety, hiring, and integrity leadership. We also just received notice of our inclusion in Ethisphere Institute’s List of the World’s Most Ethical Companies for the 11th consecutive year. Finally, we pursue markets, clients, and assignments, where we positively impact communities and regions. We seek assignments where we can improve the quality of life through enhanced safety, increased mobility, reduced carbon emissions, and reduced fuel consumption. These assignments are core to our Critical Infrastructure segment. And in addition to the benefits I just outlined, they also improved communities by spurring local economic growth, enhanced by our innovative advanced transportation management systems. In summary, we had a strong 2019. We delivered record revenue, record profitability, strong organic growth, and significant margin expansion in both business segments. Additionally, we invest in our employees and technology to further differentiate Parsons solutions. We also continue to deliver a smarter, safer and more sustainable future through our ESG initiatives and our roles in supporting our customers’ vital missions. With that, I’ll turn the call over to George to discuss our fourth quarter and fiscal year 2019 financial highlights. George?

Thank you, Chuck, and good morning, everyone. Today, I’ll organize my remarks into the following five key areas: the income statement, cash flow results, our balance sheet, contract awards and 2020 guidance. I’ll also discuss certain financial metrics on an adjusted non-GAAP basis, where doing so provides a meaningful comparison to prior financial results. As Chuck indicated, we had a strong finish to 2019 and reported record revenue and profitability for the full-year. Total revenue for the fourth quarter increased 12%, with strong organic revenue growth of 7% from the fourth quarter of 2018. For the full-year, total revenue increased 11%, with organic revenue growth of 4%. This was driven largely by Federal Solutions with organic growth of more than 6% in that segment. Indirect SG&A expenses increased $25 million from the fourth quarter of 2018, primarily due to additional acquisition intangible asset amortization expenses and costs related to legacy long-term incentive compensation plans. As indicated in our previous earnings calls, this incentive compensation expense is driven by fluctuations in our share price. The primary long-term incentive plan that gives rise to this expense will continue through the end of 2020 and will then sunset. GAAP EPS for the quarter increased to $0.14 per share and adjusted EPS increased to $0.48. Adjusted EBITDA of $88 million increased $34 million, or 62% from last year and adjusted EBITDA margin improved by 260 basis points from the fourth quarter of 2018. These significant increases were driven by strong results across the entire business. I’ll turn now to our operating segments, starting first with Federal Solutions, where fourth quarter revenue grew 24% year-over-year. This increase was due to organic growth of 14% and contributions from our OGSystems and QRC acquisitions. Federal Solutions adjusted EBITDA doubled from the prior year quarter, and our adjusted EBITDA margin increased 330 basis points to 8.5%. These increases were driven primarily by contributions from our acquisitions and higher-margin growth on existing contracts. Now, a few words regarding our Critical Infrastructure segment. Fourth quarter organic revenue grew 2% year-over-year, driven by growth on existing contracts. Critical Infrastructure adjusted EBITDA increased 36% year-over-year and our adjusted EBITDA margin increased 210 basis points to 8.4%. These increases were primarily driven by improved contract performance execution and cost reductions. Next, I’ll discuss cash flow and balance sheet metrics. Our net DSO at December 31, 2019 stands at 55 days, compared to 53 days at the end of 2018 and 58 days at the end of the third quarter 2019. Our fourth quarter operating cash flow totaled $90 million, and we generated strong cash flow of $269 million over the second-half of 2019. Fourth quarter cash flow was less than anticipated and was impacted by accelerated client payments received in the prior quarter, higher-than-expected cash taxes and contract extensions that have lengthened the completion of certain legacy projects and the associated collection of performance incentive fees and contract retention. Capital expenditures totaled $24 million in the fourth quarter 2019 and $68 million for the full-year. As discussed in previous quarters, CapEx has been at elevated levels throughout 2019, primarily due to costs associated with ongoing office consolidations and systems automation initiatives. We anticipate CapEx to decline as a percentage of revenue in 2020. And over the long-term, we expect it to approximate 1% of total revenue. Our balance sheet continues to be very strong. At the end of the fourth quarter, gross and net debt were $249 million and $67 million, respectively, as we ended the quarter with a net debt leverage ratio of 0.2 times. Regarding awards. We reported contract awards of $903 million in the fourth quarter, representing a book-to-bill ratio of 0.9 times. For the full-year 2019, our book-to-bill ratio was 1.1. Our backlog at the end of 2019 totaled $8 billion, representing approximately two years of revenue at our current run rate. Now let’s turn to our guidance for 2020. For fiscal year 2020, we expect revenue to be between $3.95 billion and $4.05 billion. Our adjusted EBITDA is expected to be between $330 million and $360 million, with a margin of approximately 8.6% at the midpoint of our revenue and adjusted EBITDA guidance ranges. Our cash flow from operating activities is expected to be between $230 million and $250 million. Other key assumptions in connection with our 2020 guidance are outlined on Slide 10 in today’s PowerPoint presentation, located on our Investor Relations website. With that, I’ll turn the call over to Carey to discuss some of our fourth quarter operational highlights. Carey?

Thank you, George. As Chuck and George indicated, we had a strong fourth quarter and fiscal year 2019. I’m very proud of our employees’ continued focus on the customer and delivery of their critical missions and for producing outstanding financial results for our shareholders. In the fourth quarter, we delivered organic revenue growth in both segments, with exceptional growth in our Federal Solutions segment and we achieved significant margin expansion across both segments. From a revenue perspective, our success is driven by our alignment to the National Defense Strategy in growing and enduring markets, our ability to win large new contracts, achieve strong win rates and deliver solid program execution. For margin expansion, in addition to the items Chuck mentioned, we executed on our programs to maximize award and incentive fees and we won higher-margin business. During 2019, we won six single-award contracts over $100 million, which is the most ever in a single year for Parsons. These contracts range in scope from cyber, to missile defense, to high-end software, hardware and systems integration work. In other words, critical work that is vital to our customers’ missions. We also have seven additional single-award contract bids worth $100 million or more that are awaiting notice of award. Also in 2019, we were awarded seven prime multiple award contracts, over 400 million in value. In total, we now hold over 50 prime IDIQ contracts. I’d like to highlight a few notable fourth quarter contract wins: a $90 million cyber contract with classified customer, three additional cyber contract awards valued at $77 million. The work on these contracts is for classified and unclassified federal customers to provide various services, including secure and resilient architecture development, secure communications, cyber risk and threat assessment for the enhancement and resiliency of weapon systems and special security capabilities required in dynamic operational space missions. As part of a joint venture team, Parsons was awarded the $805 million Foothill Gold Line light rail extension project that will benefit travelers across the Los Angeles Metro service area. We’re a 25% joint venture partner on this project, and we’re providing design and construction management services. As part of another joint venture team, we were awarded $194 million contract for the 14-mile extension of the Greater Minneapolis light rail transit system. On this contract, we’re a 35% joint venture partner, and we’re also providing design and construction management services. Finally, we were awarded a multiple award contract with a ceiling value of $2.1 billion for utility monitoring and control systems. Parsons has supported this critical work for over 30 years. On the technology front, we’re focused on driving innovation through our research and development investment and leveraging our portfolio of other transaction agreements, or OTAS. OTAs provide a responsive vehicle to advance research and development, deliver innovative solutions and perform rapid prototyping. We are a consortium member on 32 OTAs and we have over $300 million in active OTA awards. We’ve already received an additional $50 million in OTA awards year-to-date in 2020. Strong execution on our existing contracts is also driving revenue growth through high recompete win rates, our ability to recognize milestone payments and incentive fees and our ability to win new work due to strong cost performance on existing contracts. Our performance execution had some distinguished highlights in fourth quarter: Salt Waste Processing Facility, where we completed our contractor operational readiness review, verifying our readiness to startup the nuclear facility operations; and the Smart Cities Challenge, where we announced the 10 semifinalists on our first-ever smart city challenge with our partners, including Amazon Web Services, Verizon and CoMotion. This competition entitled transforming intersections will significantly increase mobility around cities and reduce the time citizens spend at red lights. Applications were received from around the world and the winner will be announced in the second quarter of 2020. And finally, as we announced in November 2019, we realigned our organization to further drive business growth and execution in 2020. As part of this realignment, we consolidated our eight markets in the six markets, which includes cyber and intelligence, missile defense and C5ISR, space and geospatial solutions, engineered systems, mobility solutions and connected communities. This structure enables us to further focus on growth markets and better leverage organizational synergies. From a technology perspective, we initiated a product management organization to further develop solutions in critical areas such as sensors, data processing and analytics, directed energy, command and control and critical infrastructure, which are applicable to our cyber space and missile defense markets. In addition, QRC Technologies, the company that we acquired in the third quarter of 2019, recently filed four new artificial intelligence patents. This complements our core portfolio of over 70 artificial intelligence contracts. In summary, our team continues to grow and execute well, and I’m proud of our many accomplishments. We achieved our revenue and profitability objectives, won large strategic contracts, delivered strong program performance to enhance new and recompete win rates, won significant OTA and IDIQ awards, and optimized our organizational structure to drive additional growth. With that, I’ll turn it back over to Chuck.

Thank you, Carey. To summarize, 2019 was a successful first year as a public company with record revenue and profitability. As I look forward, I’m very excited about our future. We have a Federal Solutions portfolio aligned to the National Defense Strategy and its focus on multi-domain operations. This strategy prioritizes our advanced capabilities, including cyber, space, hypersonics and artificial intelligence. We have a critical infrastructure portfolio aligned with the trends of urbanization and technology transformation that leverages our technology and operational expertise to deliver a smarter, safer and more sustainable future. We have a strong balance sheet that we will utilize to continue targeted organic and inorganic investments. We also have a disciplined business strategy focused on leveraging our business momentum to drive additional growth, margin expansion and shareholder value. Now, we’ll open up the line for questions. Dave?

Operator, you may give the instructions.

Thank you. [Operator Instructions] And our first question comes from Matt Sharpe from Morgan Stanley. Your line is open.

Chuck, George, Carey, good morning.

Good morning, Matt.

On the 2020 revenue guide, what does it imply for organic growth of the company and segment levels? And maybe just some color around how we should think about the quarterly cadence this year?

Thanks, Matt. This is George. Relative to the quarterly cadence, I would suggest that you view the same shape of the curve as you saw in 2019, which has actually been kind of our history for the long-term. Relative to organic growth, we anticipate mid-single to high-single-digit growth in the Federal segment. And, in fact, in Critical Infrastructure, we expect that we’ll see a decline in revenue, which is in keeping with what we’ve been saying throughout the IPO. And between 2018 and 2019, we’ll be down very slightly, so you can consider Critical Infrastructure over the term as being flattish.

Got it. Thanks. And then just a quick one on balance sheet/capital deployment. Obviously, the leverage is approaching near zero at this point in your cash balances, approaching 200, so plenty of dry powder there. Can you give us an update on what your M&A pipeline is looking like relative to recent quarters, obviously there has been a flurry of activity here throughout the industry. And so, I just want to get a sense of what you’re seeing in terms of size and in terms of number of transactions crossing your desk?

Great question, Matt. This is Chuck. Yes, you’re right. The M&A pipeline remains full and very active. We are continuously screening that pipeline for prospects that are aligned with our core markets. And as we stated, that’s been cyber, intel, defense, C5ISR, space geospatial, and connected communities. And also the core technologies we’re looking for: artificial intelligence, autonomous cloud computing, and IoT. And the good news is, there’s a lot of companies out there of various sizes and configurations. We really continue to focus on a higher-margin and higher growth companies that have a fair amount of IP in either software or hardware products and are mission focused. And in that, we’ve got a robust pipeline that we’re reviewing weekly, and in constant discussions with companies determining where they’re going and how they align with our strategy or don’t align with our strategy.

Got it. Thanks. Very helpful. And one last one, if I may. Just want to get your thoughts here on the FY 2021 budget. Obviously, it’s roughly flat depending on how you slice it, but obviously the company has refocused itself into some higher-growth areas of that budget. So, any color around that, that might help us think about how your addressable market, if you will, is growing here will be useful?

Well, as we think of the National Defense priorities, we think we’re right in line with where they’re looking. Obviously, it’s – we’re involved in daily cyber skirmishes around the world, and it’s –America is going to have to keep its vigilance and investments in its cyber defenses. We also are in a space environment that is getting more crowded with more participants. And it’s another place, where between our launch integration capabilities, our command and control, and cyber capabilities for space are going to continue to play a major role in protecting U.S.’ space and geospatial assets. And additionally, as we look at hypersonics potential from a missile defense perspective, that’s an area we think we’ll continue to get investments. So although the topline may be flattish, we think that underneath that there are areas that are growing and we think we’re positioned in those and others that may be trimmed in order to maintain the growth of these areas that the nation views as higher risk. On Critical Infrastructure, when you look at the urbanization trends that we’re talking about and the technology transformation, there literally isn’t a city or transit agency that we haven’t talked to that’s trying to consider how to deal with increased traffic either in transit systems or autos, more effectively, more efficiently, and more safe, and that’s right in the sweet spot of where we’re focused on those budgets as well.

Great. Thanks so much.

Thank you. Our next question comes from Gavin Parsons from Goldman Sachs. Your line is open.

All right. Thanks. Good morning, everyone.

Good morning, Gavin.

Hey George, I was hoping you could walk us through just cash from ops for 2020, just if we look back at 2017, 2018, there was a high 200s, 2019, 2020 is kind of low to mid-200s, but presumably 2020 includes a little bit of catch-up of the 2019 fee award slippage. So maybe just what’s a normalized conversion ratio, and what are any kind of non-recurring headwinds that are happening in 2019 or 2020? Thanks.

Yes. So let me start there, Gavin, with 2019. In 2019, the shortfall is probably about two-thirds related to client working capital items, which is noted in the prepared remarks relates to delays, expenses, and the times on projects, which in many cases actually will fall over into 2021. It’s split about evenly between the Federal Solutions and Critical Infrastructure segments. The other one-third related primarily to cash taxes, both sundry other issues, including items related to the IPO. They were a little bit higher than anticipated. In 2020, the change from prior expectations relates to again some movement of working capital to 2021 but also relates to issues associated with payments of the incentive compensation, amounts that we’ve talked about on the recent earnings calls. In 2020, that item is about $25 million. Again, that relates to increases in the share price. We anticipate that there’s a potential for some fall-over of that amount also into 2021. But, of course, it relates to movements in the share price from here. Given the volatility in markets recently, it’s obviously hard to produce – predict share prices, but that’s something you should keep in mind as well.

Got it. Is there a normalized ratio to EBITDA or adjusted net income that you target for cash from ops conversion, or free cash?

Yes, adjusted net income, we should probably run pretty much in line in 2020. I would hope for some slight positive leverage. 2021, we anticipate that that’ll be a really very solid year for cash flow.

Okay, thanks. And then on margins just in regards to kind of the medium-term 10% target, if you could give us an update there? I mean, is that something that you think you can hit in both segments? Obviously, continued margin expansion in 2020, despite I think, you mentioned much higher R&D. So maybe where you stand on being able to hit that either as a total company or within each segment?

Yes. We – our original goal on that, which remains is that within three years, we would be at that 10%. We – we’re on track for that. We think that Federal Solutions has got the ability to get to 10% in 2020 – late 2020, some or certainly by mid-2021. And Critical Infrastructure, we’re probably looking at more or like mid-2021, maybe as late as early to mid-2022. And so at Parsons Corporation, in the total, we would think in the 2021 timeframe or as late as mid-2022, which would put us three years from the IPO. So we think we’re still on track for that, Gavin.

Got it. Thanks.

Thank you. Our next question comes from Edward Caso from Wells Fargo. Your line is open.

Good morning. Thank you. Can you talk a little bit about what plans you may have put in place and what conversations you’re having over the COVID-19 concerns at the moment? Thank you.

Certainly. So to date, the COVID-19 has not materially impacted our business. There have been some travel restrictions that we’ve seen kind of overseas. We’re implementing workarounds for all those. Our response management team has been meeting daily since probably the 1st of February and wrap – kind of evaluating this rapidly evolving situation issuing guidance. We’re monitoring all the external sources that you and others are monitoring from governments, customers, subject matter experts. We’ve restricted all travel to Level three countries. We’ve adopted practices in alignment with the CDC direction. And although, I think, it’s very difficult to predict what we’re going to see over the next couple of three months, as we stand today, we’re pretty close to all systems normal and obviously, we restricted some travel and improved the care, the cleanliness of our facilities and more disinfection and things like that. But in terms of affecting operations, it has not been material to date.

Are you hearing anything from your clients sort of stepping up their level of concern? Are they getting ready? And I guess, maybe one area I assume you had some skiffs and that’s not worked and can be moved. So are there scenarios where you can work around that?

Well, yes, so the skiffs are split between our facilities and our customers’ facilities. And obviously, there’s some flexibility in moving back and forth. Our project teams are working with our customer teams to look at workarounds should a skiffs be closed for any reason, as well as what work that we can do from home. Are there parts of classified work that are actually we can adopted in a non-classified facility, and with the final work having to be done within a skiff. So all of those are the kinds of options and workarounds that are being worked right now with our teams and with our customers.

Last question…

Well sustained very closely tied out with our customers through organizations, including Professional Service Council and AIA and tracking the guidance that’s been issued by OPM as well as the voluntary services and the intel community.

Last question, can you talk about in the capital deployment partner up – part of the model? In the past, I think, you’ve mentioned using share repurchase maybe to offset some dilution – option dilution. Would you be willing in the current market to maybe buyback stock here, assuming you view your stock as attractive? Thanks.

Yes. So we certainly aren’t counting anything out at this point. And we – and again, our job is to do what’s best to – for our shareholders and returns. And we agree that prices are looking – so it’s a good buyers market we think right now. So the share price looks attractive and that’s certainly not off the table.

Thank you.

Thank you. Our next question comes from Cai von Rumohr from Cowen and Company. Your line is open.

Yes, thank you very much. So Q4, it looks like the 14% organic growth of Federal Solutions implies relatively narrow and sequential improvements in inorganic growth, which I assume would be OGS and QRC. Were those items a little bit behind track? How come there wasn’t more growth? Thanks.

Yes, Cai. Thank you. So one of our strategies with OGSystems, by the way, which is doing very well was to not continue as a seeder contractor with one of our intelligence customers, and we instead focused on replatforming our contractual base to a larger prime role. That did require we had to win, so new prime roles there. These are really focused on higher-margin software and hardware development work that we think is right in our sweet spot. So we knew that going in. And we haven’t announced it publicly yet, but we’ve got a new multi $100 million win, it said that, that was absolutely the right strategy, where we’re going to be the prime doing hardware, software development for that customer. So we did see a little bit of tail off as we walked away on the revenue from that – those contracts in OGSystems. But we’re right on track with our projections and now celebrating a nice win in hardware and software development. ORC’s results were slightly impacted by the continuing resolution as part of that – yes, did slowdown some hardware sales, as well as the announcement we were coming out with some new products. So those products will be rolling out this year and we’re very bullish on QRC as well.

We also had some critical wins on the legacy Parsons side and combined with our acquisitions, including the one that we announced last quarter, which was the Combatant Commands Mission Support contract for $590 million, we were awarded the Bucholz Airfield job for $229 million, the Technical Services Support Contract with classified customer for $175 million, Minotaur contract with classified customers which involves all of our acquisitions for $150 million, and the Launch Manifest System Integration contract for $100 million. So we’re seeing terrific wins across the Board and almost every bid that we’re submitting involves all of our companies.

Super. Thank you very much. So can you update us on the outlook for GBSD now that north of appears to have won it and about to start?

Well, there’s obviously still in their detailed discussions, there’s not going to be a lot to report, Cai, until later in the summer, I think, that – the schedules calls for an August signing. So, the scope of the underlying jobs hasn’t changed. Our role is still consistent with what we’ve thought it’s been and everything seems to be moving forward. And it’s just going to take time, a few more months to get everything worked out and with the Air Force and for Northrop to sign a contract.

We’re also excited that they’ve added Bechtel to the team. And we’ve partnered with Bechtel over many decades, and so we’re looking forward to working on that contract with them.

Terrific. And last one, follow-up to Ed’s question on COVID-19. Approximately, what percent of your employees work in skiffs and what percent work at home? And given that this looks like a much bigger deal than everyone thought a couple of weeks ago. Is this changing your attitude toward M&A that you might want to wait to see if prices get lower, or is this full speed ahead? Thanks.

Thank you, Ed. Yes, we don’t report the number of people that work in skiffs. I mean, that’s information we can’t reveal. It is not impacting our view of the markets. And I would think that most sellers that we’re talking to have a longer-term view of the market as we do. Obviously, the multiples are down right now. And so that may slow up some actions, I would think, in some cases and other cases, it won’t. But in terms of our focus, it remains the same scalable software, hardware product IP associated with services in those fast-growing markets, where there are key to our customers’ vital missions. And we believe that since these missions are vital between us and our customers, we’ll come up with workarounds and methods to keep moving forward.

Just could you say what percent of your employees work on site, roughly, and what percent are – have potential to be able to work at home?

What I can tell you is most of – the vast majority of our employees work, not in customer sites, they work in our offices or from home already. And we have the ability to move more folks to work from home and connect. And we do have people that work remotely on all types of our contracts, both in Federal Solutions and Critical Infrastructure.

Thank you.

About 3,600 of our employees out of the 16,000 are clear, so the remainder have a lot of flexibility.

Great.

Thank you. Our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Hi, good morning, everyone, and thank you for the time. I had a question on Federal Solutions. The margins were above 10% EBITDA margins in Q3 and then down to 8.5%. Can you talk about how we should think about that business in 2020, maybe mix as you’re winning new contracts, if you could elaborate on just – there has been a little bit of volatility within the profitability of that business?

Yes. On the volatility, as you referred to, Sheila, in that has really had to do with when we book award fees and some incentive fees. And so in any one quarter, it can be up a bit. It’s not due to underlying operational performance issues. So our estimate is for continued steady increase in the margins of that business, as the new work that we are bidding, the new software and hardware development work that we are performing and selling, those are at materially higher margins than our historical work. So we think that’ll just continue the client that we’ve been talking about. We see it continuing on that same trajectory. And there could be in any one quarter, we could have a higher number, because we recognized a larger than anticipated award fee.

Okay. Thank you. And then within Critical Infrastructure, can you – is there anyway to size the program roll off? And how we should think about new programs rolling in that have higher margins in that business for 2020?

Yes. So the programs that have been rolling it have been pretty consistent. For the last 18 to 24 months, the work is all at or above the the margins that we’ve – the 10% margin is we’re looking for. So we’ll continue to see a roll-off through 2020. That’s part of the reasons why the revenues are down. We don’t view that as a negative. That was part of our strategy. As we said over three years, we think it’ll be relatively flat. But as those revenues went off that carried lower – very low margins, we’re replacing those with contracts that have much richer margins and with less rollout costs, that kind of results in a reduction in revenue in 2020. So, George, anything that you’d like to add to that answer?

No, I think that you covered it quite well. Yes.

Okay. Thank you. And then, Carey, one for you. In terms of the Cyber business, I think, Chuck might have mentioned pretty high win rates 90% to 100% and you won the big contract in Q3 and I think four additional ones in Q4. How is this work different than what you do, or I guess, what was the competitive edge or the competitions that has that changed and who you’re going up against in these types of awards?

So I would say, the competition is pretty consistent. What’s changed for us is acquisitions, starting with Polaris Alpha, which brought in additional data analytics capability, artificial intelligence capability, coupled that with our high-speed processing capability that we had at legacy Parsons, our visualization environment, then with OGSystems, bringing in the geospatial intelligence and QRC with the RF spectrum. We now have the ability to provide end-to-end more robust solutions and that’s enabled us to bid and win large prime contracts, like the CCMS for $590 million.

Okay. Thank you. Thanks a lot.

Thank you. [Operator Instructions] And our next question comes from Joseph DeNardi from Stifel. Your line is open.

Hey, good morning, everybody. George, just to maybe put a – sorry to beat the dead horse, but the guidance does not assume anything related to COVID-19. Is that fair?

That is correct. As Chuck indicated, we really haven’t seen any notable impact yet. And as to mitigation, we general have a very flexible workforce. So we’re already developing contingency plans if we have a large number of people who need to work remotely. So we do not anticipate any impact.

Okay. And then just on the infrastructure side, I think, there were some work that, that you guys were lower-margin work that you guys wanted to let roll-off. Can you quantify maybe how much of an impact or headwind that is to 2020?

Yes. In terms of numbers, I don’t believe we’ve given numbers on that. But what I can tell you, it’s been in our plan from the beginning. And these were just contracts, they have large amounts of low to no margin subcontracts in them. And their completion dates range through the year pretty equally. And that’s where the reduction of revenues coming, but it’s also why we’re seeing the increase in the margins.

Okay. And then I think in your 10-K or the registration statement, at least, S-1, you guys did used to disclose how much of the – what your incentive fee recognition was and how much of the target or potential incentive fee that had been? Can you give us that for 2019, what that was?

Yes. I would tell you, Joe, it’s very comparable. We’ve always seen historically. There was the one very notable outsized fee recognition in the third quarter relative to a project in Federal Solutions, but that is – it’s on par.

Okay.

It’s on par 2020 to 2019.

Yes.

Yes.

Yes.

Okay, 2020 to 2019. Okay. And then just on the cyber part of the business, I know that that’s maybe an area that, that you guys are pretty excited about. Can you talk about what the pipeline there looks like whether that’s an area of kind of M&A focus for you all and maybe just kind of what you’re seeing in that market? Thank you.

Yes. So the pipeline does remain a focus. And when we think of cyber in, as it pertains to our pipeline, it’s – we actually look at cyber from several verticals. Within cyber, there’s a software development component that we’re very focused on. There’s the corresponding hardware, whether it’s the high-speed processing as Carey referred to the RF signals, geospatial, data capture. There’s cyber now resiliency required in some of the space Critical Infrastructure. So those are all areas that we’re looking at as it relates to cyber, all focused on the federal government. We’re not looking for commercial cyber. Now, a lot of that cyber, as we’ve said in the past, we believe has direct applicability to our Critical Infrastructure customers, especially those that operate, rail and transit systems, water systems, smart cities applications. So those remain in our critical focus and it’s a robust pipeline in that area.

To elaborate on what Chuck said, we have 16 billion total qualified pipeline. We have…

Just to clarify that bid pipeline versus M&A pipeline.

Right. We have 50 pursuits that are over $100 million in contract value. Within the Cyber Domain, we have over 10 pursuits that are over $100 million in contract value. That spans customers from the intelligence community and the Department of Defense and includes both offensive and defensive cyber. And if you add in our space pursuits, we have another six that over $100 million in contract value and most of those include a cyber element.

Okay. Can I just ask it in terms of how much of the current business is cyber versus how much of the pipeline – the qualified pipeline is cyber?

It would be roughly at sixth [ph].

Is the current…

Both.

On both. Yes. Probably what we’re seeing in cyber is a more – is a transformation of the type of opportunities becoming larger in scale. I think that’s the single biggest thing that we’re seeing, Joe, is that you could look as a trend in the cyber and Intel business for us and much more technology focused.

That’s helpful. Thank you.

Thank you. [Operator Instructions] And our next question comes from Tobey Sommer from SunTrust. Your line is open.

Thanks. You mentioned in your prepared remarks increasing your R&D spending. Could you describe that and what the trajectory may be over time, kind of whether it’s internally funded or customer funded in parts? Thanks.

Yes. I’ll take that in general, and I’ll have Carey provide some more details to that, Tobey. So we have our own IR&D budget, and that’s what I was referring to that increased significantly in 2019 and almost doubling in 2020. That is all in our federal space, or predominantly in our federal space, not exclusively in our federal space. We do some IR&D in our connected communities applications as well. And then we augment that with customer pay for R&D and OTAs, the other transaction agreements. So when you put all of those three together, it’s a pretty sizable R&D budget, some of which we are investing in, some of which our customers investing in, some of which are OTAs. Carey perhaps, you can give a little color on some of the exciting things that we’re investing in R&D?

Sure, Tobey. So we’ve doubled our research and development budget as we go into this year. QRC Technologies going to be a big focus as we’re coming up with some additional products and product enhancements. We’re also investing in Smart Cities applications, developing a dashboard application and applying artificial intelligence. Within our cyber area, we continue to invest in high-speed data processing, we feel that we’re the leader in that area and want to stay on the leading edge as far as vulnerability research. And then we’re investing in some of our product technologies, which include our PeARL, the tech system, our PeARL Flashsystem for intelligence, surveillance and reconnaissance.

Thank you. Could you – it was helpful that you sized cyber. Could you do the same for the space domain? And maybe not just currently, but how you see it playing out over time given the spending increases? Thanks.

Yes. So just talking about space, that’s an area that we’ve been playing in a long time in terms of focusing on a lot of those budgets that we refer to are classified budgets. What we can talk about are the number of launches that we’re supporting with our Launch Manifest Integration. And last year, we conducted one. This year, that’s….

We have two planned this year.

…two planned this year and increasing steadily over the next three or four years. And that’s really a new area that there’s – we’re kind of the firm leading the charge in that regard and invested in our new highway facility in Torrance, California to support that business. Also, as we mentioned, the impact of hypersonics, which will probably have some impact on space, the satellites that are used to track hypersonic threats and can – and help launch counter hypersonic responses, as well as the cyber and work that’s required to protect the assets that are already in space and those that will be launched. That’s an area that we think has just got tremendous growth that will come after as both the defense and probably on the commercial side, although that’s not really an area where we’re playing right now. Operator?

Thank you. And we’ll take a follow-up question from Joseph DeNardi from Stifel. Your line is open.

Yes, thanks. Just one last one for me. I don’t think you guys have any direct exposure to the energy markets, correct me if I’m wrong, but just given what’s happened there recently. Do you see any customers or markets that could be kind of indirectly affected by that? Thank you.

Thanks, Joe. No, we have very little exposure to the energy markets. Most of the work that we do for them is an environmental cleanup and remediation work and sub-optimization. It’s a very small piece of our portfolio and don’t see a lot of impact from that and domestic United States. I think the area that we’re watching closely and we’re working on the most sensitive projects and have seen these kinds of ups and downs before with little impact is that our customers in the Middle East whose – the government’s revenues obviously come mainly from oil and gas. But as we witnessed in the global financial crisis and prices going up and down in the past, that really Critical Infrastructure we work on has been a relatively stable spend in the past and we don’t foresee any major changes in that through this patch of volatility in energy prices either.

Thank you.

Thank you. And that does conclude our question-and-answer session for today’s conference. And I’d like to turn the conference back over to Dave Spille for any closing remarks.

Thank you, and thank you for joining us this morning. If you have any questions, please don’t hesitate to give me a call. We look forward to speaking with many of you over the coming weeks. And with that, we’ll end today’s call. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.