Q4 2022 Parsons Corp Earnings Call
Good morning, and welcome to the Q4 2022 Parsons Corporation earnings Conference call.
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Now I'd like to turn the conference over to your host today, David Scully Sir. Please go ahead.
Thank you very much good morning, and thank you for joining us today to discuss our fourth quarter and fiscal year 2022 financial results. Please note that we've provided presentation slides on the Investor Relations section of our website on the call with me today are Terry Smith Chair, President and CEO and Matt Apple as CFO .
Today Cary will discuss our corporate strategy and operational highlights and then Matt will provide an overview of our fourth quarter financial results and a review of our 2023 guidance. We then will close with a question and answer session.
Management May also make forward looking statements during the call regarding future events anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict actual results may differ materially from those projected in the forward looking statements.
Due to a variety of factors. These risk factors are described in our 8-K filed on February 15, 2023, and the risk factors to be referenced in the 10-K for fiscal year ended December 31, 2000, 2022, which will file within the next couple of days. 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.
It 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 will turn the call over to Kerry.
Thank you Dave.
Morning, and welcome to par since fourth quarter and fiscal year 2022 earnings call.
We had a strong finish to 2022 and she may record revenue and adjusted EBITDA for both the fourth quarter and for the full year, while generating solid cash flow.
We also delivered on our 2022 objectives, which French all of that is strong consistent organic revenue growth throughout the year.
We have a leading national security portfolio positioned to deliver solutions that outpaced near peer threats and we are a pioneer in exploiting digital technology to upgrade our global infrastructure and then find out paid sem spend.
For the fourth quarter total revenue increased 16% year over year and 9% organically. This was driven by 18% growth in critical infrastructure, all of which was organic adjust.
Adjusted EBITDA grew by 8% and cash flow from operations was $89 million for the quarter.
For the full year, we exceeded $4 billion from revenue and $350 million adjusted EBITDA for the first time in our company's history. We also delivered operating cash flow growth of 16%.
We achieved organic revenue growth of 9% for the full year, driven by strong hiring and retention on contract growth and our ability to win new contracts.
As a result, we were one of the organic growth leaders in both of our business segments in 2022.
In addition, we maintained a robust balance sheet, while completing our largest acquisition since our IPO. We ended the year with a one four times net leverage ratio and extra tour continues to win significant contracts and is making meaningful contribution to starve ourselves.
For both the fourth quarter and for the full year, we have achieved a book to bill ratio of one point O times on an enterprise basis, and our critical infrastructure segment, we achieved a book to Bill ratio of 1.3 times, which is the ninth consecutive quarter, we exceeded one point O times.
During the fourth quarter, we were awarded three contracts that exceeded $100 million, bringing our total to 11 contracts worth $100 million or more in 2022.
Significant fourth quarter single award contract wins included a 12 year follow on contract for environmental remediation on the giant mining program in Canada, which is one of the largest mine reclamation projects in the world.
But the value of this program to a person is approximately $2 billion of which we booked $270 million in the fourth quarter.
This is the third largest contract went on Pearsons history, and its significant ESG accomplish but that reinforces our commitment to protecting human health and safety, restoring the environment and maximizing socio economic benefits.
Additionally, we were awarded $122 million option here contract for SIFI biased our exercises operations in information services by the General Services administration.
Under this contract we booked $40 million in the fourth quarter of 2022.
Parsons is placed to support the intelligence community by providing critical global cyber and intelligence technologies.
Exit tourists overseas security installation services program received the second of five potential award years valued at $119 million on this contract ex tour. It provides the department of state what technical security installation operation centers and counter unmanned aerial systems worldwide.
Good.
Ex tour also one two task orders totaling approximately $80 million on the integrator base defense security system contract to provide the United States Air Force with a platform that seamlessly integrates computing power and communications in tolls for situational awareness.
We were awarded a sole source contract with the chemicals customer to develop and implement innovative and sustainable solutions for environmental remediation, including emerging contaminants at both active and inactive manufacturing sites across North America, the contract value of $75 million over five years.
Yeah.
In addition, we won prime positions on three multiple word ITI two contracts of $900 million ceiling contract with the Air Force for 10 years to deliver systems and synthetic environmental development solutions and $95 million ceiling value of contracts over five years with the Navy to provide engineering services.
And a $58 million ceiling value over three years for the Toronto Transit Commission's renewable energy program.
And finally after the fourth quarter of 'twenty to 'twenty. Two ended we were awarded a $94 billion of Recompete single award contract from a classified customer for cyber capabilities development and support services.
We continue to build on our long standing ESG commitment during the fourth quarter. We received three military veteran unemployment awards. Additionally in 'twenty 'twenty. Two we were named one of the world's most ethical companies by Ethisphere for the 13th consecutive year honor by the human rights campaign as a 2022 best place to work.
For the LGBTQ plus community and we're recognized by numerous other institutions for our stem and diversity hiring practices.
As I mentioned in my opening remarks, we delivered on our objectives for 2022, which included four priorities to drive growth and profitability priority. One was to capture new high quality projects with increased global infrastructure spend and we won three significant contracts in 2022.
Two were good got projects to support the development of a major middle East industrial cities and the third contract with $148 million Riyadh Metro program management contract domestically. We also captured plunged from the infrastructure Bill on federal aviation or Braille in transit programs and we expect to see inquiry.
[noise] opportunities in 'twenty, two 'twenty three and beyond as additional programs are allocated funds from the infrastructure investment and jobs Act.
Priority two was to ramp up staffing on new business and task order wins and I'm extremely pleased with our performance during 2022 our ability to win new contracts retainer reached peaks grow existing contracts increased hiring by 42% and maintained employee retention ahead of.
Industry benchmarks were all key contributors to our strong organic growth.
Priority three was to continue to move up the solutions integration value chain.
Our differentiated and complementary portfolio in federal solutions and critical infrastructure has enabled us to solve a merchant customer priorities such as P. Fast P fast emerging contaminant removal.
That's a tour with the financially accretive acquisition to our top and bottom line. It brought strong capabilities in security and surveillance systems, biometrics and counter unmanned aerial systems, etc. Enhances our position in both the federal solutions and critical infrastructure markets.
Our law school whats to make continued progress on completing the remaining legacy critical infrastructure programs.
During 2022 we made progress against all three projects one project reached substantial completion and the other two programs advanced to more than 90% and 70% complete although we have more work to do on these programs I am pleased with our team's progress.
Thanks to the hard work and dedication of our talented employees 2022 with a successful year for persons with record revenue and profitability.
We substantially increased hiring and continue to have retention rates above industry benchmarks. One is significant amount of new business acquired in accretive company that enhanced our strategic position in both the critical infrastructure in federal solutions segments, and we maintained our strong balance sheet.
Looking forward the 2023 we entered the year with a strong macro environment backdrop, supporting our business with an increasing defense budget unprecedented global infrastructure spending and continued geopolitical tensions including cyber threats.
Our 2023 priorities are to win new projects associated with increased global infrastructure funds capture federal solutions strategic contract pursuits, expand critical infrastructure merchants and acquire accretive assets.
I am very excited about our future over the last year and a half we made significant changes started business by moving up the solutions integration value chain and hiring key executives. These changes enabled us to achieve record revenue and profits in 2022 and become one of the organic revenue growth leaders.
Both of our business segments.
We are well positioned in two complementary in growing markets and we will continue to invest in our people technology business development initiatives and strategic M&A to maintain our momentum and drive shareholder value.
Most importantly, we will continue to deliver on our customers' missions, which are experiencing increasing demand at both national security and critical infrastructure.
With that I will turn the call over to Matt to provide more details on our 2022 financial results and our guidance for 'twenty twenty-three Matt.
Thank you Carrie just curious indicated fourth quarter and fiscal year 'twenty 'twenty results were highlighted by record revenue and adjusted EBITDA as well as well as solid cash flow.
Total revenue of $1 $1 billion for the fourth quarter of 2022 increased 16% from the prior year period, and it was up 9% on an organic basis.
Organic growth was driven primarily by the strength of our critical infrastructure operations.
Our exit door acquisition contributed approximately $67 million of revenue for the fourth quarter.
Adjusted EBITDA of $98 million increased 8% from the fourth quarter of 2021, and adjusted EBITDA margin decreased 70 basis points to eight 9%.
The adjusted EBITDA increase was driven primarily by Ecuador, and the ramp up of new contract Awards.
The year over year margin decreased to eight 9% was driven by unfavorable indirect rate impacts higher incentive compensation costs, given the company's performance in 2022 and volume on a lower margin Federal solutions program.
Total revenue for the fiscal year 2022 increased 15% from the prior year and was up 9% on an organic basis.
The strong organic growth throughout the year was driven by hiring and execution in both segments.
Acquisitions contributed approximately $205 million of revenue for the full year.
Yes unit expenses for the full year were 18, 5% of total revenue compared to 27% in 2020, one due to the efficient growth across the portfolio.
Fiscal year, adjusted EBITDA of $353 million increased 14% from 2021 and adjusted EBITDA margin decreased five basis points to eight 4%.
The adjusted EBITDA increase was driven primarily by improved program performance and accretive acquisitions. The margin rate decrease was driven by lower equity and earnings from joint ventures.
I'll turn now to our operating segments, starting first with federal solutions, where fourth quarter revenue increased by $69 million or 14% from the fourth quarter of 2021.
This increase was driven by organic growth of 1% and approximately $67 million from etc.
Organic growth was impacted by the completion of our SVP of contract and unexpected seasonality on specific programs.
Federal solutions, adjusted EBITDA decreased $4 million or 8% from the fourth quarter of 2021, and adjusted EBITDA margin decreased 200 basis points to eight 5%.
These decreases were driven primarily by unfavorable year over year indirect rate impacts higher incentive compensation and volume at a lower margin Federal solutions program.
I would note that our adjusted EBITDA margin of 9% for the fiscal year 'twenty 'twenty. Two was in line with plan and is representative of future annual expectations.
For the full year federal solutions revenue increased $325 million or 17% from 2021.
This increase was driven by organic growth of 6% and approximately $205 million from acquisitions.
Organic growth was driven by the ramp up of work on existing federal transportation and cyber contracts.
But whole solutions adjusted EBITDA for the full year increased $36 million or 22% from 2021, and adjusted EBITDA margin increased 40 basis points from 8% eight 6% to 9%. These increases were driven primarily by acquisitions and improved program performance.
Moving now to our critical infrastructure segment.
Fourth quarter revenue increased by $83 million or 18% from the fourth quarter of 2021, all of which was organic this strong growth was driven primarily by the ramp up of hiring on new and existing contracts in the middle East.
Critical infrastructure, adjusted EBITDA increased by $12 million or 30% from the fourth quarter of 2021 and adjusted EBITDA margin increased 80 basis points to nine 4%.
The adjusted EBITDA increases were also driven by the ramp up of a accretive new contracts and existing contracts and improved operating performance.
For the full year critical infrastructures revenue increased $210 million or 12% from 2021, all of which was organic.
This strong growth was driven by the ramp up of new urban development transportation and environmental remediation contracts.
Critical infrastructure adjusted EBITDA for the full year increased by $7 million or 5% from 2021 and adjusted EBITDA margin decreased 60 basis points to seven 7%.
The adjusted EBITDA increase was driven primarily by improved program performance and the ramp up of new and existing contracts margins were impacted by lower equity and earnings from minority joint ventures and as previously discussed.
Our investments to support growth.
Next I'll discuss cash flow and balance sheet metrics.
Our DSO at the end of Q4 2022 was 69 days up one day from the prior year period.
Our fourth quarter operating cash flow totaled $89 million.
Operating cash flow for the full year increased 16% to $238 million as compared to $206 million in 2020 one.
Although we although we generated significant cash flow growth, we were below our expectations. As a result of timing of a few international receipts, we expect receipts to recover from these delays in the first half of 2023.
Capital expenditures totaled $11 million in the fourth quarter of 2022 and $31 million for the full year.
Capex continues to be well controlled and remains below our planned spend of less than 1% of annual revenue.
Our balance sheet remains strong as we ended the quarter with a net debt leverage ratio of below 1.4 times, our low leverage and undrawn borrowing capacity will enable us to continue to make internal investments and accretive acquisitions to drive additional growth.
Turning to bookings for the fourth quarter year over year contract award activity increased 34% to $1 $1 billion driven by growth of 52% in federal solutions, and 26% and our critical infrastructure segment.
Book to Bill ratio for both the fourth quarter and the full year was 1.0 times.
Our backlog at the end of the fourth quarter totaled $8 $2 billion in line with the third quarter of 2022 and total backlog continues to represent approximately two years of annual revenue.
Now, let's turn to our 'twenty to 'twenty three guidance, we've taken a measured approach in developing our 2023 guns and are confident in our ability to achieve results within these ranges.
For 2020 three we expect revenue to be between 4.3 dollars 75, and 4.5 $75 billion. This represents 7% growth at the midpoint of the range and 4% growth on an organic basis organic growth is expected to be led by critical infrastructure segment.
Federal solutions revenue is also expected to grow in 2023. However, the growth was tempered by lower volume on a quasi one contract NSW PFS completion.
Our adjusted EBITDA is expected to be between 365 and $405 million with a margin of approximately eight 6% at the midpoint of our revenue and adjusted EBITDA guidance ranges. This represents margin expansion of approximately 20 basis points from 2022.
The growth in adjusted EBITDA and associated margin is expected to be driven by improved program performance and operating leverage.
Our cash flow from operating activities is expected is expected to be between 270 and $330 million at the midpoint of the guidance range, we expect free cash flow conversion to be greater than 105% of adjusted net income.
From a timing perspective, we expect Q1 revenue to be our lowest quarter of the year, but up 11% from Q1 of 2022 from Q1 onward, we expect sequential improvements through Q3, and then down sequentially. In Q4, we anticipate first quarter 'twenty two 'twenty three adjusted EBITDA to be up approximately 6% from Q1 of 2022.
From Q1 onwards, we expect sequential improvements through Q3, and then down slightly in Q4.
From an operating cash flow perspective, we expect typical seasonality with negative operating cash flow in Q1 of approximately $70 million and then positive cash flow with sequential improvements throughout the year.
Other key assumptions in connection with our 2023 guidance are outlined on slide 13 in today's Powerpoint presentation located on our Investor Relations website.
With that I'll turn the call back over to Carrie Thank you Matt.
In closing I'm very pleased with our 'twenty 'twenty tube results, we delivered on our 2022 commitments, resulting in record revenue and adjusted EBITDA, all along with strong cash flow growth.
Looking forward to 2023 and beyond we will benefit from tailwind in both our federal solutions and critical infrastructure segments with all six of our end markets simultaneously growing cyber space and missile defense critical infrastructure protection transportation, environmental remediation and urban developer.
Matt.
We have a leading national security portfolio positioned to deliver solutions that outpaced near peer threats and we're a pioneer in exploiting digital technology to upgrade our global infrastructure at a time of Python spend and as a collective company. We are uniquely positioned to capitalize on areas that crossover between federal solutions.
And critical infrastructure.
Before we begin the Q&A session I'm pleased to announce that we will be conducting our investor day on March 15th at the New York Stock Exchange. This will be a great opportunity to learn more about our strategic vision here from business unit leaders and participate in Q&A sessions. We hope you will join us for this or that.
With that we will now open the line for questions.
Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your touched on phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from but Sudan with Stifel.
Okay.
Hey, good morning.
Good morning.
They carry about.
Could you maybe help walk us through the guide in a little more detail if I look at <unk> critical infrastructure had a super strong quarter, our margins turning the corner a bit you know organic growth well ahead of expectations.
Is there a view that that momentum slows and twenty-three or is this more federal solutions driven I know you said you expect organic growth of both but if I look at you know sort of the EBITDA in 'twenty two relative to 'twenty, three and you sort of layer in the annualized <unk> of <unk>.
The tour and some of the growth on critical infrastructure it.
It would seem like maybe there was more upside if you just sort of a conservative view or or do you have an expectation that federal solutions sort of stepped back a little bit.
Yeah. So first we're going to continue our trend of putting together measured guidance of for 2023. So we have total growth at 7% organic growth of 4%, which is 5% for critical infrastructure of 3% for federal we have some tail headwinds I must say on the federal side of the house in terms of <unk>.
Revenue way up to specifically salt waste processing facility is $20 million and then quad children are declining because we reached to pick up her formats is $67 million. So we'll be offsetting that from a revenue perspective on the critical infrastructure side, obviously, we remain very strong.
We're pleased to have I'd say also with our continued track record of competitive wins, we have strong our win percentage of 49%. We still have about 8 billion of awards that we have not put into backlog. So those are single awards that we've won but just because of the.
Our bookings approach we've taken a great examples giant mine, where we expect the program to be worth 2 billion, but it's 207 8 million from a margin perspective as we go from this year into an extra in critical infrastructure, we expect to have higher equity in earnings of $8 million, which will help boost our margins there if you.
Looked at a critical infrastructure, which is where we think the most margin potential is we're gonna be focused on operating leverage and having our revenue continued outpaced our cost growth as we did this year, having continued strong program execution, the higher equity and earnings and then we're fortunate where our demand is much greater than supply in a row.
Infrastructure market.
And one thing I'd add some you know specifically for extra tour were expecting about $110 million of organic growth for <unk> for 2023. So you know they had a strong wrap up for the year, which so the 100 about $110 million of inorganic from for next year.
Okay. That's super helpful. If if I think through you know maybe focusing on the federal solutions side I know Kerry you said before you know much more heavy exposure to our D C or D. It looks like those budgets are going to be you know those budgets are going to be really strong in 2023.
Can you just sort of walk us through how you're maybe thinking about your business correlating with those budgets you know what the opportunity set looks like.
You know whether it would be on your missile defense contracts, whether it be in your cyber contracts and then just to that.
In addition to that is there an update on where T. S. S. C stands I know that was your largest recompete.
Yes. So we are excited about the overall defense budget as well as they are D. T any budget, which stuff like I'd be focused on near peer threats. There is that we expect that continued growth our cyber security both on the offensive defensive side, we play very heavily on the convergence of cyber and electronic warfare.
And information warfare to be able to fight.
A war against a nation state such as China space and missile Defense will both continue to be high growth areas for us as well as critical infrastructure protection again, we're fortunate that all of our end markets are simultaneously growing and boosted by a strong defense budget as well so strong our D G any budget.
On the Recompete for the FAA contract, we anticipate an announcement likely second quarter of this year and again, we feel that based on our several decades of strong performance for that customer that we're highly optimistic that we will be awarded that contract.
Great. Thanks, Kary, Thanks, Matt.
Thank you Bert Thanks, Mark.
Thank you and the next question comes from Tobey Sommer with truest.
Thank you.
Within the infrastructure.
Segments are.
Could you talk about the.
Uh huh.
The contribution to growth from Saudi and the infrastructure Bill in the U S.
And how its tracked versus your expectations so far.
And when do you think that the.
The peak for those contributions to the company's growth and profit may be sort of out in the future.
Sure. So let me start off with.
I'll start with the U S. The infrastructure Bill we have already started to see some infrastructure Bill funding generally that's come through federal aviation and federal rail and transit. There's two types of infrastructure funding. There are the of Formula funds, which are the ones that are quickest out and then there's grant programs and.
Particularly new grants, which take a little bit longer from a planning perspective, we've assumed that we're going to see a ramp up as we approach the end of 'twenty, three and going into 'twenty floor with a likely peak around the 26 timeframe. The nice thing on the infrastructure funds as the monies go to last a long time and our estimate is somewhere around 60.
Eight years in terms of long term funding in the middle East both based on the Saudi vision 2030, as well as the strong oil prices that we've experienced over the year. They were able to move many of their programs to the left so we were awarded as I mentioned on our call two of the gigabit projects for the middle East as well as.
The Riyadh Metro, which is the largest metro system in the world and we're doing some other efforts around entertainment venues and mixed use housing and in addition to Saudi UAE also has a large emphasis right now on transportation urban development. So we've seen quite a bit of growth there.
That's the prices are today, our whole middle east business roughly over $650 million of annual revenue and that will continue to grow as we move into next year, we're not yet at a peak I would say somewhere in the next couple of years, we would expect to see that peak, but we're definitely still on an incline.
Thanks, and if I could ask one.
Federal question.
You look for in your guidance for relatively modest organic growth there.
How would you.
Sort of rank order the expected areas of contribution to that growth.
Did you mention cyber offensive and defensive in some of the areas, where you sit there, but how does that compare to <unk>.
Space.
Other areas of focus within that segment.
Yeah. So.
Thanks, Toby and again, we do take measured guidance.
So from a contribution perspective engineered systems, well be organically declining, but overall growing because they ought to tour contribution because that's where the two programs I mentioned earlier, the salt waste processing facility in applied chiller and recite but within engineered systems, we're seeing substantial contribution and critics.
Infrastructure protection extra tour in particular has had very strong win rates focused on electronic security systems counter unmanned air systems, and overall base protection within the defense and intelligence area. We have seen growth. This year on our missile defense program or we've been supporting the missile defense.
H D for over 40 years, we're starting to see a little bit of a surge effort in areas like defense up Guam and continued focus on hypersonic I would say cyber and that kind of convergence of cyber electronic warfare information warfare, which falls under our defense and Intel will be the fastest area of growth. So and then we do.
Do you expect to see continued growth in space, particularly around space launch space domain awareness in space resiliency.
Okay.
Thank you Tobey.
Thank you.
Thank you.
The next question comes from Josh Sullivan with the benchmark company.
Hey, good morning.
Good morning, Josh.
There's been a number of high profile near misses as related to the U S as well as some rail issues getting more attention here could there be any accelerated opportunities for you coming out of the infrastructure Bill because of this.
So we are looking at those areas right now the effort that we're focused on is a technical service support where we supply the supply support to all their FAA sites throughout the United States.
One area of Big focus to your point is going to be on how do we modernize the FAA system and that's an area that we are looking at pursuing so we do anticipate some future growth there on the rail side, we implemented at the end of last year to meet the federal mandated positive train control program 1.0, There's an addition.
Note to point out focus which is how do we capture some of the data that's coming off the systems that we've now installed and be able to do better predictability to improve safety and efficiency. So we're focused on that with our customers and I would add a third area is gonna be cyber security on both of those areas are very focused on.
And how do they make sure that they're protected against cyber threats.
Got it.
And then when you look at those 11, you know 100 million dollar awards, you've received how much more runway is there on those large opportunities going forward.
It really varies so if I take Farro mine for example that we announced at the end of last year. That's a 20 year program giant minus a 12 year programs. Some of the others are five year programs. So it really varies by contract.
And then just one last one what are you seeing as far as labor availability and cost you know do you see any moderation anywhere.
So we had just a little bit of a.
Wage inflation increase this year, what we're saying is we expect that to go down somewhat as we go into 2020 three I'm really pleased with our both our hiring and our retention efforts, though if you look at our Q4 over Q4 from 'twenty to 'twenty two to 'twenty 'twenty. One we grew hiring by 33.
3% and if you look at the full year for 2022 of our 2020. One we grew by 42%. So I think our team is doing a fantastic job of recruiting people and I'd say on the other side of it we're running well below the pwc industry benchmarks for retention. So that means we're doing a terrific job obviously of being able.
To drive our organic revenue growth.
Great. Thank you.
Thank you Josh.
Thank you and that's what the customer ran a Perez Mora with bank of America.
Good morning, everyone.
Good morning, Marianne do a follow up question on and stay on solutions, unlike tons or sense of how you're thinking about the potential of a continuing resolution into fiscal year 'twenty four because I do agree piece called yard twenty-three strong the threats are not easing, but the recent bodyguard environment that could end up you know come to you.
Resolution next year. So how are you thinking about the risk to that in your existing programs and also the opportunities there.
Thanks, Barry on a great question under continuing resolution first we have the ability to run a full year without seeing an impact due to the C. R. I also mentioned earlier, we have 8 billion of contract ceiling value that we havent booked that we've been driving task orders over two and that was a large contributor to us being able to it.
Cheap our organic growth. So we can run a long way kind of under our existing ceiling that we havent in place I'll also say you know, it's kind of hard to speculate on the overall budget picture, but I will say persons in our overall industry, we've learned to be able to manage through this budget turbulence. We've obviously had it for decades now.
And given that we have so much demand in both our national security and our critical infrastructure market areas.
Areas, we can write in quite awhile without having any impact.
Perfect. Thank you and then if I may add another question on their money could you mind as Kathy how does the environment on M&A, where do you see opportunities right now.
Yes, thanks on the M&A area, we're looking at both federal solutions and critical infrastructure, we're going to keep our very high criteria be selective in the companies that we buy look at companies that are growing greater than 10% on the top line have greater than 10% EBITDAR margin and most importantly, our.
Technologically differentiated to be able to accomplish our customers' emerging missions, we have a robust pipeline and expect to continue our pace of doing at least one to two deals a year.
How is the pricing of sales right now.
Our transaction prices in adjusting to the new interest rate environment.
Yeah, we haven't used to be honest, we haven't really seen as much of a reduction in expectations on the sell side. So you know where we are optimistic that you'll start to see some pressure. So as Kerry mentioned, we're very diligent.
Diligent as we go through the process and where we've been.
So we'd probably passed on a couple of deals in the last few quarters last two quarters I would say because of the higher expectations than we were interested in.
Perfect. Thank you.
Thank you and the next question comes from Sheila <unk> with Jefferies.
Thank you and good morning, everyone I'm wondering too.
Wanted to dig into F S margins, a little bit more they dropped off in the quarter and you mentioned software spend collage of land that are a $60 million headwind or $80 million headwind combined.
You know what wire, what's kind of going on with profitability are those contracts just higher margin can you talk a little bit about that and your outlook for flat.
Yeah. So first overall for the year, we're very pleased with our federal margins. We came in at 9%, which is what we expected to commence in the fourth quarter. We had some unfavorable rate impacts a year ago, we had kind of a pick up on rates and so if you look at the year over year. That's basically was the main contributor there.
Again from a margin perspective, I'd say federal a deliberate as.
As expected at the 9% range for the year, Yeah sure that carry kind of hit on this but I would say throughout the year. You saw we had really strong base and and managed our cost well so kind of the downstream effect of that is in Q4, when we update billing routes that we kind of come down and it has a negative impact. So I would say the programs that are running off really don't.
Have a substantial margin impact S. W. P. F was favorable Cogs is probably a little bit lower margin, so that coming down it could be a little bit accretive for us and so the positive side of the rate impact as well was unfavorable for Q4 longer term lower rates helps us from a competitive perspective, and it gives us more capacity within our singular.
We're an idea Qs so not a great story for the quarter compared to last year, but all in all really positive securities 0.9% for the total year was in line with our expectations.
And it wasn't just when we look forward for 'twenty three the flat guidance you know are.
Are there any puts and takes in that you know M&A as a potential contributor like eh.
Why is I guess the outlook flattened how do we think about that.
Okay.
Well from a margin perspective were going up 20 basis points in 2023 over 2020 two.
We have not assumed new M&A in there so to your point Sheila that would definitely be additive as it has been as we've done past M&A and that M&A has largely been reflected in federal chiller, where you're talking on the topline from you know what no no within southern closer.
No no no no that's super helpful. And then just on C. I. It was someone asked already about the mid single digit organic growth guide yeah. How do we think about the middle Eastern Middle East contribution versus other regions.
So the middle East contribution will continue to be very strong, but I'd say, we're seeing strength across the board North America has picked up both the U S with the I O J a funds roll out there as well as Canada, where they pass their bill back in 2016 and were involved in 27 of the leading 100 infrastructure programs.
Third with it in Canada, and I would say, it's just making sure that again, we have measured guidance that we continue our hiring that we've been able to do and continue our retention and continue our program execution.
Okay. Thank you.
They know us.
Thank you so.
Once again, if you would like to ask a question. Please press Star then one.
And our next question comes to Cai von <unk> with Cowen.
Hello. This is Spencer brodsky on for Cai. Thanks for taking the question it looks like it's about the whole year book to Bill in Federal solutions was below one in 2022 given this what should we expect for bookings in federal solutions in 2023. Thank you.
Yeah. Thank you Spencer so we've planned for a book to Bill of 1.1 for federal in 2020. Three as you know awards are very lumpy I think what's really important is the ability to drive organic revenue, which we've been able to do it you know 9% for the company, 12% and critical infrastructure, 6% what's in federal.
Continuing our strong win rates of 49%, which is very good and then again, we have quite a bit of bookings. So you don't see reflected because our approach is to book the base share. It make sure that we get up to that level of funding then we bought the follow on option years. So a great example, there is our team's contract for missile Defense agency even.
Though the word was 2.24 billion, we fully booked $618 million.
I would also one last point to Spencer we were awarded two contracts right at the end of the second right at the beginning of Q1, just Miss Q4, one of them, we've already announced for 94 million for an intelligence community are delivering cyber solutions. The second one is a large contract golf.
So that's been negotiated and it falls within the federal as well.
Thank you.
Thank you.
Thank you and the next question comes from Louie Dipalma with William Blair.
Whatever he Matt and Dave Good morning.
Lewis.
Yeah.
You announced the large barrel mine extension carry or are there other large <unk>.
Environmental remediation projects similar to the Faro and giant mine programs in your pipeline.
Yes, So we announced last.
Last year, we announced giant mining this quarter both of those are very significant jobs and the billions of dollars and then again far or what rundown about 20 years and giant will run about 12 years for US there are other large reclamation jobs, what we're starting to see is the United States is really putting an increased focus on it.
We formed some partnerships with groups such as Navajo nations are to be able to do a pipeline. There now having said that the two mines in Canada or some of the largest mines in the world. So the magnitude won't be quite the same but there are opportunities within the U S as well.
Great and these contracts are very long term.
Sure and in general for.
Environmental remediation projects that have like a 10 year duration how does.
The revenue recognition and margin structure work over the course of the contract.
So first off is that something that I'm sure here in a minute, but first I will say on these contracts. They are a continuation efforts, but we're just gonna see expanded scope.
So for example on giant mine, we expect our scope is increasing by about 66% as we move into a term to because of the amount of work that has to be done versus term one Maggie.
Yeah, just on the river excited at standard you know Costco. So it would be as we as the cost comes in it will be recognized the revenue there's no pre pre recognition or anything on any substantive part of it.
On the margin side I would say, it's probably pretty flat throughout the period the opportunity would be as they ramp up and grow they will get a little bit of an absorption opportunity. So there could be some growth in margin, but I don't think it'll be substantive enough to drive overall company necessarily.
Great and switching gears with the.
The rising geopolitical tensions and accelerating development of counter.
Hypersonic missile activity what are your general expectations for.
Your missile Defense agency is working in 2023 and beyond it seems as though there was strong funding in the defense budget, but what are your expectations.
Even if there is.
A threat of a continuing resolution or shut.
Sat down in <unk> and 'twenty 'twenty four.
Yeah, So our contract again its already been awarded for the two point to.
3%.
Okay.
Birch clause that they can exercise it at any time.
There's three areas of focus for the missile Defense Agency. One is defense of the homeland. A second one is defense of Guam and the third one is the counter hypersonic activity. So that those are the three priorities that our team is supporting missile defense agency on today.
Excellent. Thanks Kerry Thanks, Matt.
Thanks, Louise Thanks Luke.
Thank you and that's all the time, we have for questions. This morning. So at this time I'd like to turn the floor Davis filling in for any closing comments.
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.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.
Hey, Keith.
Yeah.