Q3 2020 Parsons Corp Earnings Call

Hi, and welcome to the third quarter 2020, Parsons Corporation earnings Conference call.

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I'd now like to hand, the conference over to your host today Mr., Dave Kelly Vice President Investor Relations. Please go ahead.

Thank you good morning, and thank you for joining us today to discuss our third quarter 2020 financial results. Please note that we provided presentation slides on the Investor Relations section of our website on.

On the call with me today are Chuck Herington, Chairman and CEO, George Ball, CFO, and Kerry Smith, President and Chief operating Officer.

Hey, Chuck will discuss execution against our corporate strategy George will provide an overview of our third quarter financial results and then Kerry will review our operational highlights. We then will close with a question and answer session.

That's right 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 statement.

It's due to a variety of factors.

These risk factors are 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.

Good morning, everyone on the call and walk them to Parsons third quarter 2020 earnings call on this eventful warning of continued vote counting.

We had a great third quarter and this was against a backdrop of challenging global macroeconomic conditions we.

We delivered record adjusted EBITDA, while also delivering outstanding cash flow. These.

These accomplishments once again reflects the resiliency of our combined portfolio federal solutions and critical infrastructure.

After the end of the quarter, we announced the pending $300 million acquisition, Braxton Science and technology group.

Actually reinforces our strong position in a rapidly expanding space market.

We're very excited about joining forces with Braxton. It further expands our cutting edge space capabilities are strong government space customer base and expands our addressable market to include critical ground based technology systems.

This acquisition exceeds all of our quantitative and qualitative M&A thresholds.

Now I'll review, a few of our third quarter financial highlights.

We reported adjusted EBITDA of 101 million. This is an adjusted EBITDA margin of 10% achieving on an interim basis, one of our long term financial targets announced during our IPO last year.

We also generated $145 million of operational cash flow and ended the quarter with a 1.2 times book to Bill ratio driven by 1.5 times in federal solutions.

We continue to execute on our goals of winning larger programs and additional OTI Awards.

We're also simultaneously delivering strong program performance for our customers.

Simplifying these points during the quarter, we want a 300 million dollar contract with a classified customer.

Doubled our year to date, Oh Gee awards over last year.

And can continue to receive high customer satisfaction scores.

Yeah, Bob reflects our strong contract performance, which drives margin expansion.

We continue our disciplined balance sheet management and execution of our M&A strategy.

We recently closed a 400 million dollar convertible note taking advantage of historically low pricing.

Additionally, we protected shareholders by purchasing a hedging instrument that precludes potential dilution below a stock price of $66 per share.

The incremental capital we raised in this transaction was very timely.

It will enable us to fully fund, our Braxton acquisition, while leaving the financial flexibility for additional future M&A transactions.

The acquisition of Braxton underscores our disciplined approach to M&A.

We strive to acquire companies that operate in specific high priority in high growth markets.

Our market strengths are aligned with national defense priorities Cyber security Geo spatial and radio frequency intelligence space C is our in missile defense.

These markets are enduring and expected to be insulated from budget cuts.

Our core technologies of artificial intelligence autonomous systems, including counter Hypersonics.

Cloud computing, an Io T or also aligned with the nations technology priorities. So.

So braxton is well aligned with Parsons and the nation's top investment priorities.

We also like to acquire companies we've worked within the past.

And have a strong reputation in the market and benefit from our scale and broader set of capabilities.

Braxton perfectly aligns with this aspect of our M&A strategy.

We ensure M&A candidate companies have great technology exceptional management teams and our strong fit with our agile innovative and disruptive culture.

Braxton meets all of these objectives as well.

Braxton also exceeds all of our major financial criteria with revenue growth and adjusted EBITDA margins above 10%, respectively and transaction and transaction is accretive.

Perhaps it enhances our margin revenue growth profile and further strengthens our strategy to win large prime contracts within the D.O.D. and intelligence communities.

Asked and builds on our strong track record of successfully acquiring and integrating companies. It is consistent with our recent acquisitions of Polaris Alpha Oh Gee systems in Q RC technologies.

We look forward to welcoming their employees into team Parsons Kerry will elaborate further on the Braxton acquisition in a few minutes.

In summary, we delivered another strong and successful quarter.

We reported record adjusted EBITDA and record EBITDA margins delivering outstanding cash flow and achieved a strong book to bill ratio. Our operations team continues to be successful in winning large new contracts and OTN awards, perhaps most importantly, we continue to deliver on our commitments to our CFO.

Summers we.

We started the fourth quarter by announcing a strategic space acquisition and this acquisition will further enhance our position is important and fast growing market with that I've told the Carl over to our Chief Financial Officer, George Ball to discuss our third quarter 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 result balance sheet contract awards and 2020 goods.

As Chuck indicated we had an outstanding third quarter.

Long program execution, and our continued focus on cost management.

Resulted in record adjusted EBITDA and margin and excellent cash collection is true operating cash flow of $145 million.

We also opportunistically raised $400 million of additional capital to fund, our Braxton acquisition and enable investments in additional strategic growth opportunities.

Regarding the details of our financial results total.

Total revenues for the third quarter decreased by $19 million or 2% from the prior year period.

This was driven by growth in our total solution segment.

Offset by an expected decline in critical infrastructure revenue.

System with our ongoing strategy to roll off low margin pass through work.

Indirect expenses decreased $13 million from the third quarter of 2019 drill.

Driven by lower transaction related expenses and insurance costs.

Adjusted EBITDA of $101 million represents an increase of 12 million from last year.

And adjusted EBITDA margin increased 130 basis points to 10%.

These increases were primarily driven by higher earnings.

Unconsolidated joint ventures, and lower indirect expenses.

I'll turn now to our operating segments.

Morning person Federal solutions, where third quarter revenue grew by $12 million or 2% year over year.

This increase was driven by higher business volume on new and existing contracts.

Thermal solutions, adjusted EBITDA decreased $5 million or 9% from the prior year quarter.

And our adjusted EBITDA margin decreased from 10.4% to 9.2%.

These decreases result from a significant contract milestones.

Recognized in the third quarter of 2019.

Which was not repeated in the current year.

And higher pass through revenue in the current quarter.

Now a few words regarding our critical infrastructure segment.

Third quarter revenue decreased $31 million or 6% from the prior year period.

This decrease was driven primarily by lower volume on contracts with significant pass through revenue.

Critical infrastructure, adjusted EBITDA increased by $16 million or 42% year over year.

And our adjusted EBITDA margin increased 360 basis points.

10.8%.

These increases resulted primarily from higher earnings on unconsolidated joint ventures and lower costs.

Next ill discuss cash flow and balance sheet metrics.

Yes. So at September Thirtyth 2020 stands at 69 days compare.

Compared to 58 days at the end of Q3 2018.

Our third quarter operating cash flow totaled $145 million.

Primarily by strong collections in our federal solutions segment.

Capital expenditures totaled $6 million in the third quarter of 2020.

As noted by Chuck our balance sheet remains very strong.

We ended the quarter with a positive net cash position of $27 million.

Taking into account the impact of the $300 million all cash Braxton acquisition.

Our pro forma net debt as of September Thirtyth 2020.

With total $273 million.

This would equate to a pro forma net debt leverage ratio of approximately 0.8 times.

Regarding awards.

Reported contract awards of $1.2 billion in the third quarter.

Representing a book to Bill ratio of 1.2 times.

On a trailing 12 month basis, our book to Bill ratio is 1.0.

Our backlog at the end of the third quarter totaled $7.8 billion and continues to represent approximately two years revenue at our current run rate.

Now, let's turn to our guidance.

Given our strong third quarter performance and outlook for the balance of the year.

We are narrowing our fiscal year 2020, adjusted EBITDA guidance range every.

Reiterating the revenue and cash flow ranges initially established on March the 10th.

With that.

I will turn the call over to our President and Chief operating Officer Kerry Smith.

Discuss our third quarter operational highlights.

Sorry.

Thank you George its truck and George indicated we had a strong quarter from an operations perspective, and completed a significant acquisition that bolsters our space process.

I'm proud of our team's accomplishment given the challenging conditions, we're facing on a few of our contracts due to the COVID-19 pandemic. Despite these challenges we delivered strong cash flow result, and a 10% adjusted EBITDA margin for the first time in our history.

The third quarter was our strongest year to date for our federal solutions team with a 1.5 times book to Bill and we won large single award contracts strategic space on fiber contracts and other transaction agreements.

80% of our total it works in the third quarter War for nice business.

We also achieved historical milestone on our salt waste processing facility contracts by moving into the operation space and two RC technologies reported the best quarter in its entire history.

As you can imagine I'm very excited about our Braxton acquisition, which positions us well with key space customers.

Notable contract wins in the third quarter include a 307 million dollar contract win with a classified customer ordering.

$115 million option year on our combatant commands cyber mission support contract, where we provide all offensive cyber operations defensive cyber operations and open source intelligence in support of joint all domain operations.

We expanded our rail systems footprint with over $100 million, some wins, including a 45 million dollar contract by the Bay area rapid transit to start to support the implementation of a communication space train control system once.

Once complete this will be the largest communication based train control the installed system in North America.

We were also awarded the translate Broadway lineup, British Columbia, Canada for over $44 million were persons well designed the system elements for the full weight driverless rapid transit system as well as provide system assurance.

And after the third quarter, we were selected as their preferred proponent for the Edmonton Light rail transit contract in Western Canada, as a 50 50 joint venture partner.

This 2 billion dollar program is the second stage of the Valley line and a place the latest light rail technology.

Finally, we were awarded a 51 million dollar recovery if air based denied by ordinance or Brad FFO win where we employ the persons to follow ups. It was directed energy system.

News laser can hit targets more than 300 meters away and its powerful enough to detonate cluster bombs landmines and general purpose bops.

This program is also the first department of Defense Brown based laser systems placed into production.

Our momentum both winning other transaction agreements for OTI a contracts continues during the third quarter, we one strategic new O T. H contract re our total word valued at more than 200 million year to date, which is double the amount we had in 2019.

Our program execution on the salt waste processing, Saudi contract has also been strong.

During the third quarter, we were thrilled to celebrate the startup operations at this facility 80.

18 years ago, the department of energy and Parsons embarked on a mission to revolutionize the treatment of radioactive waste produced during the Cold War and contained in the underground liquid waste storage tanks at the Savannah River site.

We're now able to process radioactive waste eight times faster than historical treatment rates.

The startup of the Salt waste processing facility is a testament to the commitment and dedication of the person's workforce at this first of a kind facility.

We also continue to be pleased with GRC technologies performance as we booked large orders with the United States Marine Corps, and the United States Special operations command and the third quarter.

These sales demonstrate the continued reliance upon Q RC signals intelligence and integrated network survey products are critical department of defense customers.

The successful integration of Trc has enabled us to increase hard March or product sales and also enhanced our ability to win larger awards.

As Chuck indicated we're very excited to welcome the Braxton employees into a person's family.

Brooks and complements our existing space portfolio increases our product offerings and adds critical intellectual property expenses capabilities for the United States Air Force Space Force The Department of Defense Research laboratories, and the intelligence community.

Brad that's broad portfolio of greater than 50 proprietary commercial off the shelf products, along with the development and Sustainment of key government off the shelf products provides mission critical solutions for spacecraft Brown control and spacecraft integration.

Accenture unique mix of products and services solve complex engineering problems, including command control and communications cyber security and data processing.

As the prime contractor for the satellite prototyping and integration contract Braxton supports the United States based force Enterprise ground services program or AG, yes each.

Yes, it's a next generation architecture that will unify space craft gross twop.

Operations across multiple major government agencies.

With this acquisition percents is better positioned to capitalize on the rapid space market growth driven by the proliferation of lower orbit constellation small satellite expansion and space sorry for resiliency.

Extend has a strong reputation in the industry and history of technology disruptive Ness, and we look forward to leveraging both our technology and their expertise.

Parsons is fortunate to have known and worked with Braxton and the space community and we're cooperating already in areas, including space situational awareness and know what space weather systems.

Our portfolios are extremely complementary and will enable end to end space solutions for the war fighter.

Synergy spanning space situational awareness satellite operations space protection number. So you can see cyber security and space modeling and simulation Parsons said Braxton together will accelerate growth in the global space market.

With that I'll turn it back over to Chuck.

Thank you Carrie.

In summary, our team's third quarter execution was very strong we.

We delivered strong financial results and exceptional program performance for our customers.

We also further strengthened our balance sheet with the $400 million convertible note offering and we quickly put this capital to work with a strategic acquisition that will drive additional growth in our space market.

Before we begin to Q and a session I'm pleased to announce it will be conducting our first virtual investor day on March 11th of next year. This will be a great opportunity to learn more about our strategic vision here for market line leaders and participate in various Kunaev sessions, we look forward to the event and your participation now we'll open it.

The line for questions.

Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

To withdraw your question press the pound key.

Our first question comes from the line of ships you look I love It with you.

Freeze your line is now open.

Thank you so much and good morning, Chuck George and carry first question, maybe George for you you know looking at the implied cash flow ramp in Q4.

It's over 50% of the total and I know you guys are Q4 heavy but can you give us some of the moving a major moving pieces around working capital and if any one off items there.

Yes, certainly Sheila.

As you indicated we had a nice quarter.

Third quarter building on momentum of the second quarter traditionally the fourth quarter is a very strong quarter for us as I indicated in my prepared remarks Federal solutions was a major contributor in the third quarter.

We anticipate a significant strength from critical infrastructure in the fourth.

Including in the Middle East.

Okay. Thank.

Thank you and then you.

You know maybe another question on the business, just parsing out space and Geo spatial and cyber and Intel does two businesses were up 37, and 20% in the quarter, so pretty significant numbers and definitely areas that are more insulated from broader budget trends are there any ways.

To maybe quantify the success that you're seeing in these two businesses, whether when rates book to Bill sorry, if I missed it and if you said it and just trying to get a sense of the runway for growth.

Thank you Sheila and thank you for your questions that we're we're very bullish on our on our cyber and Intel and space and Geo spatial markets.

Those were obviously both helped in appended greatly by the acquisitions of Polaris Alpha energy systems, and our win rates have been very strong also.

Also attended by the larger contracts that we're winning than we had historically one without the acquisitions that we garnered.

And our win rates have been very strong carry mentioned a couple of the wins that we had this last quarter and we continue to be very bullish on the strong growth of those two units Inc. and our missile defense Sci Fi bias, our unit going forward to carry any additional color you'd like to add to that.

Yes, Sheila under cyber and intelligence, we had growth on our combatant command mission support contract and as I mentioned during the remarks, Q Rcs organic growth, but what's the best it's been in the history of the company.

We also had strong organic growth across the whole portfolio see eni contracts and our very strong win rates continue their within space and Geo spatial there were two primary areas. One was her launch manifest system integration contract and the second one was the T. Rex a special operations contract.

Okay. Thank you so much.

Thank you Sheila.

Our next question comes from Gavin Parsons with Goldman Sachs. Your line is now open.

Hey, good morning.

Good morning Gavin.

Hey, guys you know the the pipeline has grown pretty significantly over this year over the last few years and we haven't seen that convert to backlog yet and I know you discussed the dynamic of awarded on book value like contracts like CMS. So I guess I guess my question is one when would you expect to see that increase in the pipeline.

Actually start to drive backlog growth.

Ed do you is there any way to quantify that on book value.

Well as Weve mentioned in the past Gavin our approach on our Q contracts feed a single award or multi multiple award is to book those very conservatively. So although we may have one a billion dollar contract.

Or in the case of say see CMS contract would north of $500 million were only booking it in pieces per year, whereas I think some of our other companies in the space would book the whole item and so that what that gives US is the one we ever getting too far out in front of our headlights, but.

To the confidence that our backlog will continue to build on contracts. We've already won but just haven't booked the entire backlog yet given our booking policies. So we expect our backlog continue to grow.

Got it and then.

The next two years at least but that's what we've got some pretty good visibility.

Carry anything you'd like to add on that regarding any of the specifics.

I agree with what you said, Chuck and so to that I would point to in cyber and intelligence that we're currently getting work on would be combatant commands a mission support contract and we very conservatively only book the base and the option you're one there and the other one was the contract called Minotaur, a classified contracts, we booked last year and we did receive fee.

Just one task order in the last quarter on that contract.

Got it that makes sense.

One quick clarification on what what is the Cove in revenue headwind in dollar terms this quarter.

Yeah, if we look at.

Covidien it gets it gets tougher to estimate Gavin because one we're kind of comparing.

Actual numbers to plan numbers, but you kind of supported apart you'd look at federal solutions for example, and they'd be growing in the high single digits Sands Coven, and that's you know nominally 50.

$50 million of of headwinds that we're facing in that market, probably close to 75 across the portfolio.

So so if that's a 50 million revenue headwind this year and you haven't reduced your your revenue guidance for the year. Obviously, you know to your point that implies much better core growth.

So assuming that's a net impacts I know, there's not something big tailwind from from kind of a.

Cold it benefits that go away next year, I mean should we think about you making up that full amount of covered headwind on top of the core business growth continuing next year or is that double counting growth next year yeah.

Yeah, I think that's a double counting I say, here's the way I would think of it you know some of our contracts like Antartica, where you know they just aren't allowing us on the ice for a year they've been very fortunate to not have any koby cases, and they want to keep it that way or Kwajalein Island, where the Marshall Lees made those same decision.

Yes, both of those decisions, we don't control so when they decide to allow us on the ice or when they allow decide to allow us back on the islands think of it as we pick up where we left off and whatever that duration that we were not on ice for on island than that just extends the <unk>.

Contract out in time.

Same can be said quite.

Quite frankly for ebay.

Who has also taking a very cautious role with our unions in terms of continuing the workload. So a lot of that is just gone down down to you know base load and then the work that we didn't do well add to the end of our contracts.

Makes sense. Thank you.

Our next question comes from Joseph Denardi with Stifel. Your line is now open.

Thanks, Good morning.

Chuck can you just talk about kind of appetite appetite for additional M&A. Obviously, you have the capacity to do more on the balance sheet, but just from a kind of an internal bandwidth standpoint should we assume that you all are done for a period or two you digest, what you've done or are you still in.

In the market.

Yes, I would not jump to the conclusion that we are done we are still in the market. We've shown in the past the ability to pull off multiple acquisitions per year, we have the infrastructure built to do that.

And more or what.

Either accelerates or slows our.

The acquisition.

Situation is the quality of the.

Companies that are out in the market space and I think as I've said in past calls at any given time, we're talking to five to 10 different companies.

No better or worse works, primarily pulling out of our supply chain.

Got it that's helpful. And then and then maybe you all want to save this for the Investor day, but.

Could you provide some kind of qualitative commentary around expectations for 2021, I mean, even if it's directional revenue and margins.

Yeah, well, we'll be announcing that are.

You know with our Q4 earnings call, but I think the general take away is we we remain very bullish on the company and our markets and you know where we aren't seeing anything out of the election day or anything else that gives us any.

Pause for caution.

Okay, and then just as it relates to Braxton any any dissynergies there overlap between the two businesses that could you have for true present, some revenue dissynergies in the near term we should be aware of thank you. Yes. Thank you Charles if no there there there's no dis synergies there was a couple of very minor.

Oh, I see I contracts, we're talking like not really five people.

That had no material impact on the revenue or profit generation, it's already integration. So one of the great things about Braxton is there was not a lot of that wasn't really any overlap we were working side by side and so now were greater as one.

Thank you.

Our next question comes from Tobey Sommer with Trust Securities. Your line is now open.

Thank you when you look at Braxton and the the area in which it plays out.

What does the pipeline look like for RF peas in so much as you're aware where that the combination of the two companies made better situate shoot you a to win work once.

Once the company is in fact, a the acquisition is closed.

Yeah the activity in the space market right now is very strong.

Partially because space is becoming such a crowded frontier.

With all of the lower orbit satellites being launched but obviously, we have a great deal of activity from private industry as well as from governments trying to expanding and alike.

We also from a national Defense perspective, you have a lot of satellites in orbit that are being controlled by multiple systems and the beauty of it enterprise ground system Enterprise ground services like the work that Braxton does is it allows.

The defense Department now to others to be able to control communicate between those multiple systems.

At one point and that's an area that is.

It's going to have a lot of growth has shown a lot of growth already but will grow even more in the years ahead. So we're very excited about the space market.

I could you refresh us on the.

The arc and pace of run off in the critical infrastructure.

You did it in <unk>.

That's sort of in that time period of that being a headwind in your current thinking.

Yeah. So what we've we've been pretty consistent on that we think in a 2022, probably mid year, we'll have all of that off the books. The work we're booking now including our latest big win are really really margin rich contracts.

And so we continue to expect the margin to expand in critical infrastructure. So we're going to continue to grow that bottom line.

A healthy rate.

And the top line will be muted as we said during the IPO and after that and then we'll we'll be out of the mode of running off that low margin backlog.

And we should see topline and bottom line growing at the same rate.

Last question from me could you speak to the medium and long term.

Financial impacts of what you've learned from the pandemic work.

Work from home et cetera.

Just separate there may be some some benefits in there as well as the.

Discrete headwinds we've discussed already on the call.

Yes, great question.

One of the things we've learned is that the public wants confidence in the infrastructure they use.

And whether that is just better education over the ventilation systems or improvement there to more physical separation better cleaning regimens.

So there's going to be a lot of modifications to physical infrastructure to approve dispensing and cleaning and all of those kinds of attributes, but the other thing that its proven for our customers is that you can do a lot of things virtually in terms of controlling these networks and you can do it safely from a from a cyber person.

Active so whether it's through Virtualizing these transportation nodes and replacing servers with cloud based operations that allow for much more efficiency and a better use of taxpayer dollars going forward, we think there's going to be a big emphasis on this SaaS models.

The ability for contractors to deliver infrastructure and then charge for that on a on a pay as you go basis.

I am very bullish on the infrastructure industry. It's we think it's going to go through a lot of transformation, which would be very good for customers and for companies like ours.

Thank you very much.

Our next question comes from Ron Epstein with Bank of America. Your line is now open.

Hey, good morning, guys.

Good questions.

What what is your organic.

Right. So if you back out all the acquisitions you're on your what is your organic growth and what would be your organic book to Bill does that make sense.

Yeah. Thank you Ron you know you look at our organic growth and as we said going going for Sands Cove. It our federal solutions unit is growing in the mid to upper single digits, and our critical infrastructure, which albeit lumpy in the run off of that work arguably were running.

That is a flat unit over say three to four year period.

And we're still on track to to drive those two over.

Overall growth rates.

Some of it obviously has had some impact what's the good great news there is the agility of the team to be able to pivot and to sell more products be they've got cross.

It's products or cots products, which may not be as material to the topline, but have added a very important impact on the bottom line as well as the pivot to more professional services and IP oriented services in our critical infrastructure business.

So second question with all the M&A you guys do.

How do you measure that you are in fact, creating value right I mean, a lot of times M&A doesn't so what's your internal process to garner gate check that you know we bought that's X that it's actually.

Creates value for us.

That's that's a great question, Ron and one that our board has been laser focused on for the last 15 years given that we're an acquisitive company so for on a quarterly basis after.

After we make an acquisition we report back to the board on.

On the forecast that we have made we typically take rates and plans of the company's put in.

Really really ground truth, those numbers and get our develop our own set of numbers on what we think rates will be.

Growth rates profit rates et cetera, and then we track those for a year after year. It gets very difficult to track those as to your point. The synergies now you start winning jobs as a total parsons entity as opposed to.

Hey, Polaris Alferon, Oh Gee systems are a braxton.

But on a on a year end basis, what we've generally found is the cost synergies are greater than we forecast the revenue synergies have been greater than we forecast and the core businesses. We bought have generally been meeting their plant. So the net net of all of that is we've been creating more shareholder value out of it.

Those acquisitions that have helped compensate for things like <unk>.

But are you looking at cash on cash returns right. If you're looking for there is due by business for 300 million Bucks. When do you expect to get the 300 million Bucks back is it yeah years out five years out.

Well generally it's been more in the area of three to four years out cash on cash returns and have generally all been well.

Well they have all been margin accretive.

Got it and then I agree to that.

And then maybe one last one I know, there's a lot of uncertainty because the election and so on and so forth.

But you guys must have some sense of directionality into 2021 can.

Can you share some thoughts on that.

Yeah, So clearly I.

I think we and everyone else understands the priorities of the Trump administration fairly clearly so the challenge for US was to get a good line of sight on the by the administration should be.

It ended up when a button presidency, so I spent quite a bit of time speaking with both sides.

Of the aisle and Congress and Senate transition team members and what we came away with is their emphasis on national defense priorities are very aligned the emphasis on the underlying technologies to help.

Help defend our nation Arline. If there was one difference is that the Biden administration seem to be more.

More focused on a large infrastructure bill and how they would fund that and put that in place. So to us that was the primary difference we remain very bullish regardless of how the outcome ends up.

Got it all right. Thank you very much thank you Ron.

Our next question comes from Josh Sullivan with the Benchmark Company. Your line is now open.

Hi, good morning.

Good morning, Josh.

The margin rich contracts you mentioned their critical infrastructure can you just give us some color there you know what technologies driving that or geographies and wise Parsons winning.

Yeah. So that's a great question.

There is really two two things that drive the margin rich and this one is the expansion of our underlying technology port.

Portfolio to include things like high net or intersection as a service.

Bringing technologies Weve developed and [noise].

Federal solutions over secondly has been a phenomenal margins that we've been generating out of Canada.

And a lot of that has to do with our business model, but it's also just a very infrastructure rich environment and we have much less competition today than say they were in the infrastructure market five to 10 years ago.

So as a result of that margins have increased substantially in North America with a corresponding decline in risk transfer.

And we have leveraged our design expertise into outsized returns on some of these large infrastructure projects and the latest one is just a great example, some of this comes it comes through the books as you.

Since its we don't consolidate a lot of these are there.

We're minority partners a joint ventures, that's what really gives the upside impact to our EBITDA margins.

Hi.

And then just on the kind of turned the long term koby changes and they talk about work from home no more comfort from the customer anyway, you are willing to put some estimate on your real estate footprint consolidation, we've heard from others.

Through some pretty large assumptions.

Is there any way your people to put a finer point on that.

Yeah, well I think it's you hit the nail on the head between.

Real estate leases.

Leases and southern associated I T costs.

We think that our our populace will kind of break down a third a third third I'm not implying that it's it's going to be equal thirds, maybe a better way of saying that will be three buckets.

They'll be those employees, they're going to kind of come back to work full time in our offices and that'll be driven either by their personal choice.

Or the choice of our customers and our and our teams where they need the collaboration and working day to day side by side.

A second group will choose to work from home on a permanent basis. They were already do leaning that direction either from their child care perspectives are aging parents or some other.

Criteria that they're using and we can support that we've proven that we've done it now for seven months straight and certainly it will be a group and I think to so probably the largest group of our workforce, who will choose a hybrid arms.

Option and that option they might be working in office three days, a week and I'm working from home two days a week.

All of that leads to a net reduction of real estate costs, which are you know you can't get day, one because we often have leases that probably averaged three to four years out.

In terms of termination that we can see each year, our real estate costs coming down and improving the efficiency of the use of our overhead dollars.

Doug you know if I was to be a betting person I would say, yes on the high end, we'd look at somewhere around 40, 50% reduction and you.

On a more conservative side, probably somewhere around 30%.

So as I'm sitting here today those are the kinds of percentages are not looking at George and I are working on in our financial planning.

Well.

And then just one on Brexit and how does how does it fit into the SaaS kind of conversation and then how much of that is focused on hardware versus software.

Yeah. So braxton is a very product rich company, albeit most of it gots product or government off the shelf products.

They do have.

A very successful cots product commercial off the shelf that.

Right around a little less than 10% of revenues.

It all a lot of this is going to be dependent on what we think is going to take shape added emphasis by the federal government customers to drive more efficiency in or contracting means and methods and improve their.

Your use of taxpayer dollars and in that regard a lot of these products do hold SaaS potential. So were building our portfolio of products that we can take into a SaaS model and it'll be getting to the government to actually change their contracting methods in the meantime, we can sell those cots products off the shelf and.

Kerry much much higher margins.

Great. Thank you for the time.

Thank you.

As a reminder, ladies and gentlemen, if youd like to ask a question at this time that's star then one.

Our next question comes from Cai von Rumohr with Cowen. Your line is now open.

Yes, thanks, so much so [noise].

Most of your peers, who have already reported the vindicated favorable indirect expenses as a result of Coca the three things. They mention are less travel expense less medical expense because people are scared to have elective surgery in the hospitals because of cove it less.

Occasion paid time off and hence higher labor utilization could you comment on the potential positive.

Impacts from Cove it on your business, what you saw in the third quarter.

Yeah, I think that you know since Covidien began we've obviously seen reduced travel chi.

But I'm sure that's true for almost every business bad for the travel industry, but good for the overhead of other companies and as you said, we've seen a medical cost decline as well as.

Fewer folks are doing elective surgeries or going into their their doctor visits.

And vacation is is probably off a bit although I think we have seen and we've tried to promote people to continue to take vacations to promote.

Good mental wellbeing.

But certainly those are the three areas we've seen positive.

Wins from.

Right and what sort of impact because your margin it said solutions.

Down not only year over year, but was down sequentially.

Yes, so a lot of that Kai as you know goes to the award fees, which tend to be lumpy. We've got large award fees. We received last year off the salt waste processing facility in this years come off of some of the chemical weapons militarization work that we've done so those those episodic.

Award fees when they had.

You have a big determination on that multiple but the good news is that the margins are increasing steadily over time of the core federal solutions market as we run off more of that pass through revenue there out of engineered solutions predominantly.

And we enter our garner for one more fixed price level that for work and to greater product sales.

Great and then you know you mentioned in terms of new opportunities that you're unlikely a major subcontractor to Northrop GBSD and you also had I believe it was called detect wise.

To a portal to detect coated.

Airports could you comment on those two opportunities.

Sure Yeah, the obviously Northrop Grumman is.

Signed their contract we're in discussions with Northrop and ductile.

The initial focus is obviously getting the missiles themselves.

Worked out and prototypes in manufacturing and we continue to work on the areas of our predominant expertise around blast systems hardened systems communication systems and alike.

So we fully expect to be under contract sometime in Q4, maybe early Q1 next year.

And just remind me again, so again, we don't have any of that in our guidance. We don't put things in guidance or plans until we have signed contracts regarding detect wisely. We continue to make sales word airports as you pointed out several other industrial and.

Infrastructure customers Oh, we continue to make sales on a weekly basis and can you continue to grow I again, I'm not sure that that will ever be material, but it showed the resiliency and also quite frankly gave a huge jump start to our program to launch a new product quarter and.

What we're seeing now are new products coming out of our cyber and Intel group our space in Geo spatial group the new jobs you too.

Software product for a missile defense teams and those are right down the middle of the fairway of our market focus.

Thanks, so much.

Our next question comes from Louie Dipalma with William Blair. Your line is now open.

Chuck George carry and Dave Good morning.

Good morning, Larry.

And Chuck UN carrier referenced several recent and defense wins, including the the cyber combatant commands and the use of commercial office software I'm I'm under the impression that person's did that the sensor ingestion software for the Army's.

Hi profile distributed common ground system program and this segment is hyperwise had because it didn't have the convergence of access to it.

Hydrants areas like data analytics.

And software development. So are you able to like broadly discuss.

Like persons.

Seth or data analytics capabilities, and I'm asking because there are several other programs in the pipeline that you're involved with such as the Air Force advance Battle management system. So I'm just wondering how how you're positioned in these high growth areas.

That's a great question and let me I'll take the.

The initial response and have carry provide little more color.

But what I can say is you know.

Data analytics is a very.

Poor strategic asset capability that we have with.

We talk about artificial intelligence and we talk about correspondingly the high speed processors, we create the hardware kit that we create and.

And the data analytics that we provide in converting that large stream of raw data.

Into information with the analytics through the high speed processors, and and analytics. We are performing and then ultimately converting that into actionable knowledge with our AI algorithms that is a key element of what we are doing across all of our market sectors and that's that's pretty ubiquitous and as you say it is critical to these large new programs coming.

Now.

The other area before I pass it to carry I just wouldn't under emphasize is the work we're doing in.

Electromagnetic warfare and specifically in the area of high end lasers, and our Zeus labor, So laser system, which is embedded in our red bow products that were now we announced we're selling to the air force that is another great area of R&D, an application and commercialization for us carry as you take that a little more depth.

Yes, we spend the army submission partner for 15 years, helping them understand data and analytics and working with them to develop off the shelf software that collects information from various sensor feet and puts that data into the appropriate battle field operating systems for the operational side of the army as you mentioned person.

Didn't develop the sensor ingestion software for the distributor common ground system Army and our software is responsible for standardizing all the incoming sensor data, including the integrated sensor architecture messages that we format into the D.C.G.S.A. system to be able to easily processed and analyzed that and that.

Is critical in helping the army and department of Defense mine, the data and track. The insurgents also involved in big data platforms and other areas, including a defensive cyber mission operations program, where we service the lead system integrator for the army on the DCIO and that I would want to point out also in the critical infrastructure area, we do a lot of data.

Analytics, if you look at our intelligent network system or you look at the work that we're doing in the tolling market with our partner in the LNG.

Thanks, George and carry.

All right, Thanks, Chuck and Kelly and George I was wondering and this may be a question and better for.

The analyst day, but are you able to ballpark quantify.

What the critical infrastructure margin would be today, if you didnt have the the low margin contracts that you expect to churn off right in the middle of 2022.

Yeah, I'd say at this point.

It would go up moderately but as Chuck suggests that in a response to an earlier question you know a good part of that run off has already occurred.

So we would have some uplift.

If I were to put a number on it I would say maybe I don't know.

Basis points.

Sounds good thanks, everybody.

Thank you thank you Louise.

Our next question comes from the line of Joseph Denardi with Stifel. Your line is now open.

Thanks Chuck.

Chuck you mentioned earlier kind of still being in the M&A market can you remind us where you are willing to take the balance sheet and should we assume that using equity is off the table for not necessarily just kind of in the context of the convert and I know that wasn't.

Particularly dilutive, but I just wanted to get your view on use of equity in M&A going forward. Thank you.

Yes, Thanks, Joe in terms of the last part of that question first I think the kinds of acquisitions. We're looking at on a day to day are all going to be cash based acquisitions.

You know if we were to contemplate some sort of large transformative deal you know I don't think I would take equity off the table, but certainly on the types of deals weve historically done and the kinds of deals that we're looking at today.

And looking at the areas, we said, we would invest in obviously cyber Intel.

It is a market areas cyber and intelligence space in Geo spatial and missile defense you five is our interconnected communities work, where we're doing the advanced.

Or electronics software and hardware development work for infrastructure and then in terms of areas technologies were investing in it. So you can see areas either benefit from our work or add to our capabilities in artificial intelligence, including high speed processing and data.

Data analytics cloud computing predominantly migration of large platforms to the cloud and creation of new cloud applications.

The autonomous systems, and and autonomy assistance. We include Kinda Hypersonics sides Air Sea land in space.

And lastly, aiotv and whether it's our.

Pearl Flash Geo spatial sensors.

Or Q R C radio frequency sensors and processors.

All of the work do we do around the I O T in terms of creating new data streams and in analyzing and processing those data streams.

Great. Thank you.

That's all the time, we have for questions today I'd like to turn the call back to Batesville Lee for closing remarks.

Thank you very much for joining us. This morning, if you have any questions. Please don't hesitate to give me a call and 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, This concludes today's conference call. Thank you for participating you may now disconnect.

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