Parsons Corporation (PSN) Q3 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Q3 2022 Parsons Corporation Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this is being recorded. I now like to hand the conference over to Dave Spille, VP of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2022 financial results. Please note that, we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results. We then will close with a question-and-answer session. Management may also make forward-looking statements, during the call, regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that, such statements are not guarantees of future performance, and involve risks, and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements, due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2021, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that, these non-GAAP financial measures are not a substitute for their comparable GAAP measures. And now, I'll turn the call over to Carey.

Thank you, Dave. Good morning, and welcome to Parsons' third quarter 2022 earnings call. We delivered strong third quarter financial results, with record revenue and record adjusted EBITDA. During the quarter, we achieved year-over-year double-digit organic revenue growth in both business segments and grew adjusted EBITDA by 22% and contract awards by 21%. Operating cash flow increased by 59% year-over-year and by 28% for the first nine months of the year. We further strengthened our robust balance sheet and our Xator acquisition is making meaningful contributions to our results. Given our strong third quarter results, we are raising the midpoints of our 2022 revenue, adjusted EBITDA and cash flow guidance ranges. During the third quarter, we generated total revenue growth of 19%. Our year-over-year organic revenue growth was 11%, including 13% within our Critical Infrastructure segment and 10% within our Federal Solutions segment. These results were driven by sustained recruiting and retention, growing revenue on existing contracts, driving task orders to large single award contracts and operating effectively in two well-funded and growing markets. Our ability to successfully deliver on our customers' missions, has allowed us to continue to secure our re-competes and win large strategic contracts in areas aligned with national security and global infrastructure priorities. During the third quarter, we achieved a book-to-bill ratio of 1.1 times on an enterprise basis, and in both business segments. This is now the eighth consecutive quarter in which Critical Infrastructure's book-to-bill ratio has exceeded 1.0 times. During the third quarter, we were awarded the following notable contracts. A $121 million option year on our Combatant Commands Cyber Mission Support contract, where we provide offensive and defensive cyber operations and open-source intelligence in support of joint all-domain operations. $121 million of new work under two contracts to support the development of two major industrial cities in the Middle East. On these giga projects, we only booked the first phase of each contract. $117 million of new project work under the FAA's technical support services contract to provide engineering, construction oversight, installation and technical services. Over $70 million of the growth on this contract was funded under the Infrastructure Investment and Jobs Act. A $104 million Teams Next facilities lifecycle management recompete contract to provide advisory and technical services support to the Missile Defense Agency. A $75 million contract extension by a classified customer to provide comprehensive cyber vulnerability assessments for weapon systems. And a new $24 million task order for a military service branch to perform remedial investigation and feasibility studies where PFAS and other contaminant releases have occurred. Our Parsons Emerging Contaminant team has been aggressively pursuing opportunities in building market share with a total of over $40 million in PFAS contract wins in both our Federal Solutions and Critical Infrastructure segments over the last nine months. We also won prime positions on three notable award IDIQ contracts. The first one is classified contract to provide offensive cyber operations with a $5 billion ceiling value over 10 years. The second IDIQ win is for the Defense Threat Reduction Agency's assessment, exercise and modeling and simulation support contract with an $850 million ceiling over 10 years. And the third IDIQ contract is for the United States Army Engineering and Support Center with a $675 million ceiling over seven years. Under this contract, we will provide electronic security systems design and maintenance. A substantial amount of work on our contracts awarded during the quarter contained ESG-related work. In addition to the recent PFAS wins I highlighted earlier, one of the Middle East giga-projects I mentioned has a goal to ensure all residents and industries in the city are powered by 100% renewable energy. During my recent trip to the Middle East, I visited this site and met with customers and employees and their environmental focus is impressive. This quarter we also joined our LAX customer to celebrate the unveiling of their automated people-mover vehicles which sets a high standard for environmentally sustainable transportation, having shells made of recyclable materials and achieving zero emissions. We also continue to support numerous charities including the Tragedy Assistance Program for survivors which increases advocacy and support for the families of our nation's fallen heroes. I am proud of the work Parsons is doing to make positive impacts on our environment and society. Turning to our most recent acquisition, the Xator integration is going well. The revenue and profitability have been in line with our expectations and they're exceeding their sales targets. We've retained and integrated key leadership aligned research and development programs and are leveraging synergies to pursue new work across both our segments. Given our robust cash flow we ended the third quarter with a net leverage ratio of 1.6 times. Our low leverage and ample debt capacity will enable us to continue to make strategic investments in accretive acquisitions, research and development and our people and culture. In summary, I am very pleased with our execution this quarter and throughout 2022 and remain optimistic about our future. We delivered record revenue and profitability, as well as excellent cash flow results. We continue to benefit from our strong leadership, performance execution and our ability to win large strategic contracts. We operate in two complementary and growing markets and our balanced portfolio is a differentiator for Parsons. In Critical Infrastructure, we're seeing budgets grow across the globe, which are aligned with our transportation environmental remediation, water and wastewater treatment and urban development markets. In our Federal Solutions segment, global tensions remain high and threats continue to evolve. Our portfolio of cyber space, missile defense and critical infrastructure protection aligns to the administration's recently released National Defense Strategy, Nuclear Posture Review and Missile Defense Review, which focused on near peer threats. Given our positive end market position in both segments, we will continue to invest in our people and technologies to drive future shareholder value. And with that I'll turn the call over to Matt.

Thank you Carey. As Carey indicated, third quarter results were highlighted by strong organic growth profitability and cash flow. Total revenue for the third quarter of 2022 increased by 19% from the prior year period and was up 11% on an organic basis. Organic growth was driven primarily by the ramp-up of work on existing and new contracts and strong hiring. Our Xator acquisition contributed approximately $71 million of revenue in the third quarter. SG&A expenses increased by $6 million, or 3% from the prior year period, primarily due to the impact of the Xator acquisition. Adjusted EBITDA of $103 million increased 22% from the third quarter of 2021, and adjusted EBITDA margin increased 30 basis points to 9.1%. These increases were driven primarily by stronger operating leverage and contributions from Xator. I'll turn now to our operating segments starting first with Federal Solutions where third quarter revenue increased by $121 million, or 24% from the third quarter of 2021. This increase was driven by organic growth of 10% and approximately $71 million from Xator. Organic growth was driven by increased activity on existing contracts and the ramp-up of recent contract awards. Federal Solutions adjusted EBITDA increased $15 million, or 31% from the third quarter of 2021 and adjusted EBITDA margin increased 60 basis points to 9.9%. These increases were driven primarily by strong revenue growth, while continuing to control costs. Moving now to our Critical Infrastructure segment. Third quarter revenue increased by $57 million, or 13% from the third quarter of 2021 all of which was organic. This strong growth was driven primarily by increased activity on existing contracts and the ramp-up of recent contract awards and increased worldwide hiring activity. Critical Infrastructure adjusted EBITDA increased by $4 million, or 10% from the third quarter of 2021 and adjusted EBITDA margin decreased to 8.1%. Our adjusted EBITDA increase was driven by strong revenue growth partially offset by lower equity and earnings. We expect our Critical Infrastructure margin to expand sequentially and year-over-year in the fourth quarter with higher equity and earnings and continued growth on higher-margin programs. Next I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3, 2022 was 68 days, equal to the prior year period and down four days from the end of Q2, with strong collections in the federal segment. Our third quarter operating cash flow totaled $123 million. Operating cash flow for the first nine months of 2022 increased by 28% over the prior year period to $148 million and increased 59% from the third quarter of 2021. Capital expenditures totaled $6 million in the third quarter of 2022, compared to $4 million in the prior year period. Spend continues to be well controlled and below our planned spend of 1% of revenue. Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of 1.6 times. Our low leverage and undrawn borrowing capacity coupled with the recent refinancing of our private placement notes will enable us to continue to make internal investments and accretive acquisitions to drive additional growth for Parsons. Turning to bookings for the third quarter. Contract awards increased 21% to $1.3 billion, representing a book-to-bill ratio of 1.1 times. Contract award activity increased by approximately 20% in both segments and our book-to-bill ratio was also 1.1 in both segments. Our backlog at the end of the third quarter totaled $8.2 billion in line with our second quarter of 2022 and total backlog continues to represent two years of annual revenue. Now let's turn to our guidance. We are increasing our 2022 revenue, adjusted EBITDA and cash flow guidance to reflect our strong third quarter results and our outlook for the remainder of the year. We have raised revenue by $75 million at the midpoint and updated the range to $4.05 billion to $4.2 billion. This represents total revenue growth of 13% at the midpoint and 7% on an organic basis. Additionally, we are increasing our adjusted EBITDA range. We now expect adjusted EBITDA to be between $340 million and $360 million, which represents 13% growth at the midpoint of the range. Margin at the midpoint of the range and – at the midpoint of our revenue and adjusted EBITDA remains at 8.5%. We are also increasing the midpoint of our cash flow guidance. We now expect operating cash flow to be between $255 million and $275 million and free cash flow conversion is expected to remain at approximately 100% of adjusted net income. Other key assumptions in connection with our 2022 guidance have also been updated and are outlined on Slide 10 in today's PowerPoint presentation. With that I'll turn the call back over to Carey.

Thank you, Matt. I'm very pleased with our third quarter results. We achieved year-over-year double-digit organic revenue growth in both business segments and grew adjusted EBITDA, contract awards and operating cash flow by more than 20% each. We also further strengthened our balance sheet and our Xator acquisition is off to a great start. Our team is delivering consistent results and we are benefiting from tailwinds in each segment. We expect our momentum to continue, given our portfolio is well aligned to important macro environment trends in two well-funded and growing markets. I would like to thank our entire team once again for their outstanding performance. Our success is the product of their hard work and dedication to solving our customers' most complex challenges. Before we begin the Q&A session, I'm pleased to announce that we will be conducting our Investor Day on March 15 next year. This will be a great opportunity to learn more about our strategic vision, hear from business unit leaders and participate in Q&A sessions. We look forward to the event and your participation. With that we will now open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Greg Konrad with Jefferies. You may now go ahead.

Good morning.

Good morning, Greg.

I think over the last couple of quarters and coming into this year you really stressed about getting back into a place of beats and raises, and you've kind of done that throughout this year. If you think about the revenue profile over the last couple of quarters, what's really improved? How much of that's new awards maybe acceleration of programs, or just tied to hiring tracking ahead of plan?

Thanks, Greg for the question. So I would say, the revenue growth has been driven by new awards as well as consistent hiring. We really turned our hiring trajectory around last July and we sustained that momentum. If you look this quarter, quarter-over-quarter our hiring is up 30%. And if you look at the first nine months of this year, we're up 46% over last year. Then from the new awards perspective on the federal side of the house we've mentioned continuously we had won all these single-award ceiling IDIQs. So our objective was really how do we drive new task orders to those IDIQ vehicles, which we've successfully done. We also had a little bit of benefit in federal with some COVID tailwinds as some of our work such as Kwajalein and FAA returned to full steam this year. On the Critical Infrastructure side of the house, we're already benefiting from global infrastructure spend, particularly, in the Middle East. They moved many of their programs to the left and we were fortunately successful on winning those. Thanks, Greg.

And then maybe just to follow-up on critical infrastructure. I mean, there's been a really good turn in that business and you kind of talked about growing budgets. You just mentioned the Middle East. But can you maybe just bucket kind of what's driving that growth? And when you think about the pipeline how is that trending? And how do you think about growth that's kind of out in front of you based on that pipeline versus maybe what you're capturing today?

Sure. So I would say we're benefiting from our portfolio predominantly in the Middle East also in the United States and then third would be in Canada. Starting with the Middle East, they've established these Giga programs where they're building new industrial cities. And our customer will be shortly announcing those programs so I don't want to get ahead of them. But a single city for example is worth $500 billion; a second city is worth $250 billion. If you look at the United States infrastructure spend, we are starting to benefit from that. As a great example on our FAA program $70 million on the FAA program has already come from the Infrastructure bill. And we're seeing benefit across our rail and transit customers as well as some of the aviation customers are moving their projects forward. And then finally in Canada, they passed their infrastructure spend back in 2016. So their programs are already well underway. And we're seeing a lot of additional work there predominantly rail and transit, but also some road and highway.

Thank you.

Thank you.

Thanks, Greg.

Our next question will come from Bert Subin with Stifel. You may now go ahead.

Good morning Carey, Matt, Dave.

Good morning.

Good morning, Bret.

Maybe just a follow-up on the infrastructure comment. Carey, can you talk about how US infrastructure has unfolded relative to what your expectations were maybe earlier this year? And what your thoughts are how that spend starts to materialize or grow sequentially as we head into 2023?

Sure. So just to recap, the infrastructure bill is $1.2 trillion, $550 billion and that is new. And where we benefit is from transportation, which sold for $280 billion of the funding, as well as areas such as power and utility, roads and highways, bridges, dams, tunnels, aviation, ports, rail and transit. What we've started to see on that Bert is initial rollout of the funds. Federal customers are getting the funds first. So an example like I mentioned the FAA, we've also seen rail and transit funding start to roll out. There was about $88 billion of road and highway funding that's been rolling out and some of the formula funds that get allocated to the states. As we've indicated in the past from a planning perspective though, we anticipate the peak of that being more along the lines of 2023, 2024. Thank you.

Okay. Yeah. No, that's helpful. Thanks Carey. Just as a follow-up, how should we think about margins going forward maybe beyond 4Q across the segments? It looked like Federal Solutions rose almost 10% in the quarter. Do you think those levels are sustainable? And then on the critical infrastructure side those margins were maybe a little lower than expected around 8%. Should we expect over time the two segments get to a point where their margins were ultimately closer? And so maybe you get some more critical infrastructure accretion over time? Any thoughts on margin would be helpful. Thank you.

Yeah, great question. So from a federal perspective as we've indicated in the past, we don't expect 10% continuously every single quarter because it really depends on the timing of award and incentive fees given that we're about two-thirds cost reimbursable business in federal. But we are pleased that with the stronger revenue that we've been bringing in, we've been bringing it in at higher margins as well. On the critical infrastructure side of the house that will improve over time. We started to roll off some of these legacy programs that we've talked in the past and those have been a drain on the critical infrastructure margin. That should be our higher performing margin segment given that we have two-thirds fixed price time and material work in that segment. So as you look forward, we'll continue to expand margins in both of the segments, particularly critical infrastructure. When you start to look at pricing strength that's going to come as a result of the global infrastructure spend, the wind-down of these legacy programs so improved performance execution. And then we continue across the board at Parsons to control costs as we've achieved this revenue growth.

Very helpful. Thank you Carey.

Our next question will come from Mariana Perez Mora with Bank of America. You may now go ahead.

Thank you. Good morning.

Good morning Mariana.

First, could you please update us on how the M&A pipeline? What are you looking for? Is it active? Not? Pricing? M&A?

Thanks Mariana. Yeah, the M&A pipeline is still very strong. We continue to have strong criteria from a financial perspective. We're looking for companies that are going to have growth of greater than 10% on the top line and greater than 10% EBITDA margin. We've expanded our outreach and we're looking at companies in both the Federal and the Critical Infrastructure segment and we have a robust candidate list in each. And we're still looking for companies that keep us focused on our strategic vision of becoming a strong solutions integrator that's differentiated by advanced technology.

Thank you. How are you thinking about the interest rate environment and uncertainty when you look at these deals?

Yes. I'm happy to take that one Mariana. So obviously, everybody is dealing with higher interest rates. I would say, at the company level, we're still -- from an average interest rate expense, we're still in the high-2s, low-3s, low-3s after our term loan. So, feel really good about where we're at as a company. We'll continue to make an assessment on what makes sense and look at accretive acquisitions as Carey mentioned.

Thanks. And if I may last one related to the quarter. Organic growth in your updated guidance is 7% organic growth, but that compares to about like 9% year-to-date. What is the main factor for deceleration in fourth quarter?

Yes, great question. We tend to have seasonality in the fourth quarter largely on our FAA contract. And then, we're also faced with holidays and vacations increase during the fourth quarter. And the third area would be we had a peak period for Quadilent [ph]. We had some major deliveries in Q3. So that will come down slightly in the fourth quarter.

Thank you very much.

Thank you.

Our next question will come from Tobey Sommer with Truist. You may now go ahead.

Thank you. Good morning. With respect to the Federal contracting environment, we've heard from some others that there may have been an opportunity for spending from last year's budget with some of the two-year money to flow into December -- the December quarter contracting. So, do you think that the December quarter could be not as good as the final fiscal of the Federal government but sort of above average this year? And do you have a sort of a baseline expectation for how long we're in a CR?

If I could answer the last one, I should get a big prize. But I would say I hope the CR will end this year and that we can continue. I think that's critically important. We've all got every company a lot of important mission work that we've got to deliver. So I really hope that we can get through that this year. I would say at the longest we would expect it to go into Q1. On the first part of your question Tobey, what we have right now is about $7 billion awaiting notice of award. We do hope that we start to see those awards move forward. We have a very strong quality pipeline within those $7 billion. I would love to see many of those awarded before the end of the year. We also have about $388 billion tied up in protest. That's all federal work as well. So again, we'd like to see some resolution on that. And in the meantime, what we're going to continue to do is, what we've been doing very well all year is driving work to our single-award contracts that is we have over $6 billion of ceiling that is unused that we haven't booked yet.

And I wanted to ask sort of a maybe a medium-term question, at least multiyear. From a growth perspective, over the last year or more, Critical Infrastructure has reaccelerated. What does this do? What are the financial implications in terms of equity earnings and/or DSO as that business accelerates? And I give those two examples but consider it open-ended in terms of what the financial implications of accelerated growth in Critical Infrastructure mean?

Yes, I'll take the first part Matt will take the DSO. To come back I think I said on our protest Tobey $388 billion. It should be $388 million that we have in protest. Regarding multiyear with Critical Infrastructure accelerating. So, equity and earnings is predominantly for us legacy Critical Infrastructure programs where we used to be a minority partner. So, you will start to see equity and earnings go down over time because we've re-pivoted the business and focused on our core which is engineering design as well as complex program management. And the purpose of this is to de-risk the portfolio and get back to areas where we know we can drive stronger margins. Matt do you want to address the DSO?

Yes. Tobey I'd say it's something we're definitely looking at. I think we're going to continue to push the teams to drive DSO down. I think there's opportunities. Obviously Middle East is a little bit longer in terms of cash collections. But there's opportunity to push the teams the customers want to pay their bills. So, it's -- there's opportunities from billings improvements and things like that. So, I don't think it will be a significant impact. We've modeled out 2023 already and feel like it's a comparable DSO type number for next year.

And then as you look at your capital allocation with respect to acquisitions, do you see more opportunity in any particular side of the business?

Yes. So, on M&A we continue to be focused on the near peer threat and we're looking at areas where we can drive the cyber space electromagnetic spectrum and information warfare convergence to be able to fight that type of war. That would be our priority and that's all the companies that you look at over the past five years have been aligned towards that vision. On the Critical Infrastructure side of the house, we're looking at technology differentiation. As we start to build back the infrastructure it's going to be done differently. In the past, it was designed for about a 30 to 35-year life span. In the future, it's going to be designed for about 100-year life span. So, technology is critically important. Then the other area which ties back to the infrastructure funding is out of the $550 billion of new funding, there's $115 billion of cyber and resiliency. So, any component that gets built is going to have to have cyber and resiliency and given our portfolio, we're in a unique position to capitalize on that.

Thank you very much.

Thanks.

Our next question will come from Josh Sullivan with The Benchmark Company. You may now go ahead.

Hey good morning.

Good morning Josh.

Just on the Middle Eastern projects you're highlighting, what does labor availability look like in the region relative to the contract flow you're looking at?

Yes, great question. So, we've been doing a great job of hiring in the Middle East. We bring in folks from over 35 countries around the world. So, we've had an expansive network. And I think the reason that we've been largely successful we've done business there for over 60 years. Extremely well-established across the region. And in Saudi Arabia, in particular, we've had a joint venture company in place for many decades. So, we know how to outreach to the right type of personnel. What we've been looking for immediately is getting very strong program management. These are first-of-a-kind unique projects that have never been done. So, it's an exciting time for people to take on that challenge and also for engineers to come over and work on those programs.

Got it. And then how should we think of the contract cycles in the Middle East versus the North American market? Any material dynamics we should think about as that region grows in importance for you? And I think you mentioned longer cycles on cash collection. But anything else we should think about?

Yeah. I would say what we've seen recently is shorter cycles on acquisition. They've moved some of these programs to the left which has really benefited us. And a lot of it is in Saudi to capitalize on Saudi Vision 2030 and how do they basically reduce their dependency on oil. And to be able to do that they need to keep the young Saudi people working, employed, motivated, having things to do. So they're building these new cities for places where people can work, but also tourism centers recreational centers. So we think that's going to continue again for the next decade to help Saudi.

Thank you for the time.

Thank you, Josh.

Our next question will come from Cai von Rumohr with Cowen. You may now go ahead.

Yes. Thank you so much. I'm joining a little bit late, but two questions. First one is, as you know the occupancy ceiling at DoD was lifted on September 14. And secondly, yesterday on the Leidos call, they discussed a congressional approval of Bill LaPlante as being a plus to get some of these awards flowing. What are you seeing in terms of the flow of awards? Is that picking up? And do you think those two pluses would outweigh the potential impact of a CR? Thank you.

Thank you, Cai. I think they are both positive changes. The occupancy lift getting people back working is very important to get things moving. Bill LaPlante we have a great relationship with him as do others in the industry. I think he's been very positive. I would also highlight the fact we added Ellen Lord to our Board recently, which I think was a significant addition who previously held that role. But I would say yes, we're optimistic that we're going to see things moving forward on the federal side. And I think our a testament to that would be 1.11 book-to-bill for federal this quarter.

Are you seeing any signs since the end of the third quarter that things are picking up on the federal side?

I would say a little too early to tell. What we are seeing is our ability still to be able to drive task orders to our unused ceiling.

Great. And then the last one. So in the Mid East as you know the US relationship with Saudi has started to see a little bit more strain. Is that having any impact on your business there, or do you expect that to be a threat in any way?

No, we don't expect it to be a threat. In fact, the type of work that we do there is good for the world because we're basically developing cities and places of employment for the young Saudis to go work and entertainment centers. So I would say no we do not expect any change. We've had that business there for six decades. It's been very solid. And based on the type of work we do there that will continue.

Terrific. Thank you so much.

Thanks, Cai.

[Operator Instructions] Our next question will come from Louie DiPalma with William Blair. You may now go ahead.

Carey, Matt and Dave, good morning.

Good morning, Louie.

Good morning, Louie.

Good morning, Louie.

Hiring and retention has been particularly strong for the past several quarters. Do you know approximately how much headcount has increased over the past year?

Yeah. We have not shared that specifically, but I'll give you the percentages, 30% quarter-over-quarter from Q3 last year to Q3 this year. And then for the first nine months of this year, we're up 46%. We also through the first nine months have already exceeded all of our total 2021 hiring.

Great. Thanks, Carey. And you referenced winning a new $177 million contract for the FAA's technical support program. And you've mentioned in the past, how your contract has been up for renewal. And what is the status of that renewal? And if you were to win such a contract would the full amount go into backlog? And the reason, I'm wondering is backlog is often scrutinized by analysts and your backlog is down year-over-year. But it seems to be like artificially low, because of this contract. So I'm just wondering, the different dynamics here with this FAA contract?

Yeah. So, first, the status of the re-compete is the bids are in evaluation. We expect an award decision to be made some time first or second quarter of next year. From our perspective of the backlog, again, we don't put everything fully into backlog. So a great example, I'll give you is our team's Missile Defense Agency contract. That was $2.24 billion. We only put in backlog $618 million. So, we would likely take a similar conservative approach on the FAA. And that's the same conservative approach that we took on these two Middle East jobs I referenced, where we only booked the first year and half. In addition, our funded backlog is up sequentially and that's really what we look at.

Great. And one final one. Carey, you mentioned how you recently visited your customer in the Middle East, and you also saw pretty exceptional growth from that customer this quarter. Is there a pipeline of new opportunities for the futuristic cities that are being built that can cause your revenue run rate in the Middle East to continue to trend higher?

Yeah, there, definitely is Louie. There's a series mostly, I'm going to say in Saudi, but also the UAE. Saudi has all these giga projects. And we were very fortunate a couple of years ago we got on the ground floor of the NEOM, Oxagon with that award. And we've been able to continue our success with the next two industrial cities. We have a very robust pipeline in Saudi. But I would also say in the UAE, where we're doing quite a bit of urban development work for companies such as EMR would be one great example. But robust pipeline there.

Sounds good. Thanks, Carey, Matt and Dave.

Thanks, Louie.

Our next question will come from Gavin Parsons with Goldman Sachs. You may now go ahead.

Hey, good morning.

Good morning, Gavin.

Good morning, Gavin.

Carey, you sized some of the total project numbers for those Middle East giga cities you guys booked I think maybe $120 million. How much of that total overall number is program management and how much of that is maybe sole-sourced to you? So I guess, the question is, what's the addressable spend there? And is that kind of front-end loaded or spread over the lifetime of the city build?

Yes. So I don't have a specific percent on how much it will go towards program management, because these are such long-term programs. They're starting now, but these are going to be decade-long programs. What I can tell you is they're using a new model what's called an integrated delivery partner model. So they will be announcing the selection of three companies for each of the projects that I mentioned. So, sole source. now that we've been awarded the work will basically be split among the three companies for those.

Okay. Did you give timing on the $120 million contracts that you've already booked?

Well, they've started. We already we're already working on those.

Is that one-year duration?

1.5 year duration is for the $120 million.

Got it. Okay. And then I think you said that NCI and Critical Infrastructure is going to trend lower over time. I think this quarter was one of the biggest you've had in a while and drove the majority of the sequential step-up in margin. Can you just help bridge the margin drivers from kind of that core critical infrastructure margin in the mid single-digits today ex NCI to the higher than 9% that you said it can surpass federal at some point?

Yes. So I think what the key drivers, first, we've had these legacy programs. And once these get off our books. We're down to two of those now the third one already is complete and it's fully operational. So we have two programs we got wrap up. One of them will wrap up second quarter next year, the other one at the end of next year to early 2024. So that will help us alone improved performance execution. As we get closer to the end of these we have a lot more visibility. So I think that's going to help expand our margin. And I talked earlier about the pricing strength that we're going to get from the global infrastructure spend that will be significant. And we're bidding higher-margin work as we move along given the fact that we've got that pricing strength.

Thank you.

Thank you.

Thanks, Gavin.

That is all the time we have for questions. I would like to turn the conference back over to Dave Spille for any closing remarks. End of Q&A:

Thank you. Thanks 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.