Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Parsons Corporation Earnings Conference Call. Please be advised today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. Dave Spille, Vice President of Investor Relations. Please go ahead, sir.

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 the call with me today are Chuck Harrington, Chairman and CEO; George Ball, CFO; and Carey Smith, President and Chief Operating Officer. Today, Chuck will discuss execution against our corporate strategy, George will provide an overview of our third quarter financial results; and then Carey will review our operational highlights. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the Company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for the 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.

Thank you, Dave. Good morning to everyone on the call and welcome to Parsons' third quarter 2020 earnings call on this eventful morning of continued vote counting. We had a great third quarter against the backdrop of challenging global macroeconomic conditions. We delivered record adjusted EBITDA while also delivering outstanding cash flow. These accomplishments once again reflect the resiliency of our combined portfolio of federal solutions in critical infrastructure. After the end of the quarter, we announced the pending $300 million acquisition of Braxton Science & Technology Group. Braxton 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, our 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 1.2x book-to-bill ratio driven by 1.5x in federal solutions. We continue to execute on our goals of winning larger programs and additional OTA awards. We're also simultaneously delivering strong program performance for our customers. Exemplifying these points during the quarter, we won a $300 million contract with a classified customer, doubled our year-to-date OTA awards over last year, and continue to receive high customer satisfaction scores. The above 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 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 and high-growth markets. Our market strengths are aligned with national defense priorities of cybersecurity, geospatial and radio-frequency intelligence, space, C5 ISR, and 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, and IoT are also aligned with the nation’s technology priorities. So Braxton is well aligned with Parsons and the nation's top investment priorities. We also like to acquire companies we've worked with in the past and have a strong reputation in the market and that 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 are a 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 the transaction is accretive. Braxton enhances our margin revenue growth profile and further strengthens our strategy to win large prime contracts within the DoD and intelligence communities. Braxton built on a strong track record of successfully acquiring integrating companies. It is consistent with our recent acquisitions of Polaris Alpha, OGSystems, and QRC Technologies. We look forward to welcoming their employees into team Parsons. Carey will elaborate further on the Braxton acquisition in a few minutes. In summary, we delivered on 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 OTA awards. Perhaps most importantly, we continue to deliver on our commitments to our customers. We started the fourth quarter by announcing a strategic space acquisition, and this acquisition will further enhance our position in this important fast-growing market. With that, I'll turn the call over to our Chief Financial Officer, George Ball, to discuss our third quarter financial highlights.

Thank you, Chuck, and good morning, everyone. Today, I'll organize my remarks into the following five key areas: the income statement, cash flow results, the balance sheet, contract awards, and 2020 guidance. As Chuck indicated, we had an outstanding third quarter. Strong program execution and our continued focus on cost management resulted in record adjusted EBITDA and margin, and excellent cash collections drove operating cash flow of $145 million. We also opportunistically raised $400 million of additional capital to fund our Braxton acquisition and enable investment in additional strategic growth opportunities. Regarding the details of our financial results, total revenue for the third quarter decreased by $19 million or 2% from the prior year period. This was driven by growth in our Federal Solutions segment, offset by an unexpected decline in critical infrastructure revenue, consistent with our ongoing strategy to roll off low margin pass-through work. Indirect IG&A expenses increased by $30 million from the third quarter of 2019, 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 by 130 basis points to 10%. These increases were primarily driven by higher earnings from unconsolidated joint ventures and lower indirect G&A expenses. I'll turn now to our operating segments, starting first with 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. Federal Solutions adjusted EBITDA decreased by $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 milestone incentive fee recognized in the third quarter of 2019, which was not repeated in the current year, and higher pass-through revenue in the current quarter. A few words regarding our Critical Infrastructure segment. Third quarter revenue decreased by $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 by 360 basis points to 10.8%. These increases result primarily from higher earnings on unconsolidated joint ventures and lower IG&A costs. Next I'll discuss cash flow and balance sheet metrics. Net DSO at September 30, 2020, stands at 69 days compared to 58 days at the end of Q3, 2019. Our third quarter operating cash flow totaled $145 million, driven 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 30, 2020, would total $273 million. This would equate to a pro forma net debt leverage ratio of approximately 0.8x. Regarding awards, we reported contract awards of $1.2 billion in the third quarter, representing a book-to-bill ratio of 1.2x. 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 2 years of 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 of 2020 adjusted EBITDA guidance range and reiterating the revenue and cash flow ranges initially established on March 10.

Thank you, George. As Chuck and George indicated, we had a strong quarter from an operations perspective and completed a significant acquisition that bolsters our space presence. I'm proud of our team's accomplishments, 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 results and a 10% adjusted EBIT margin for the first time in our history. The third quarter was our strongest year-to-date for our Federal Solutions team with a 1.5x book-to-bill, and we won large single-award contracts, strategic space and cyber contracts, and other transaction agreements. Seventy percent of our total awards in the third quarter were for new business. We also achieved a historical milestone on our Salt Waste Processing Facility contract by moving into the operations space. QRC 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 contract win with a classified customer; $115 million option year on our Combatant Commands Cyber Mission Support contract, where we provide 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 in wins, including a $45 million contract by the Bay Area Rapid Transit District to support the implementation of a communications-based train control system. Once complete, this will be the largest communication-based train control system installed in North America. We're also awarded the TransLink Broadway Line of British Columbia, Canada, for over $44 million where Parsons will design the system elements for the fully driverless rapid transit system, as well as provide system assurance. And after the third quarter, we were selected as the preferred proponent for the Edmonton Light Rail Transit contract in Western Canada as a 50-50 joint venture partner. This $2 billion program is the second stage of the Valley Line and applies the latest light rail technology. Finally, we were awarded a $51 million Recovery of Airbase Denied by Ordnance (RADBO) win, where we employ the Parsons-developed ZEUS directed energy system. The ZEUS laser can hit targets more than 300 meters away, and it's powerful enough to detonate cluster bombs, landmines, and general-purpose bombs. This program is also the first Department of Defense ground-based laser system placed into production. Our momentum of winning other transaction agreements or OTA contracts continues. During the third quarter, we won strategic new OTA contracts, bringing our total award value to more than $200 million year-to-date, which is double the amount we had in 2019. Our program execution on the Salt Waste Processing Facility contract has also been strong. During the third quarter, we were thrilled to celebrate the startup operations at this facility. Eighteen 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 can now 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 Parsons workforce at this first-of-a-kind facility. We are also pleased with QRC Technologies' performance as we book large orders with the United States Marine Corps and the United States Special Operations Command in the third quarter. These sales demonstrate the continued reliance upon QRC signals intelligence and integrated network survey products by our Critical Department of Defense customers. The successful integration of QRC has enabled us to increase high-margin product sales and also enhanced our ability to win larger awards. As Chuck indicated, we're very excited to welcome the Braxton employees into the Parsons family. Braxton complements our existing space portfolio, increases our product offerings and brings critical intellectual property that expands capabilities for the United States Air Force, Space Force, the Department of Defense Research Laboratories, and the Intelligence Community. Braxton's broad portfolio of more 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, ground control, and spacecraft integration. Braxton's 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 contracts, Braxton supports the United States Space Force Enterprise Ground Services program, or EGS. EGS is the next-generation architecture that will unify spacecraft ground control operations across multiple major government agencies. With this acquisition, Parsons is better positioned to capitalize on the rapid space market growth driven by the proliferation of lower orbit constellations, small satellite expansion, and space cyber resiliency. Braxton has a strong reputation in the industry, a history of technology disruptiveness, and we look forward to leveraging both their technology and their expertise. Parsons is fortunate to have known and worked with Braxton in the space community, and we're collaborating already in areas including space situational awareness and NOAA space weather systems. Our portfolios are extremely complementary and will enable end-to-end space solutions for the warfighter. With synergy spanning space situational awareness, satellite operations, space protection and resiliency, cyber security, and space modeling and simulation, Parsons and Braxton together will accelerate growth in the global space market.

Thank you, Carey. In summary, our team's third quarter execution was very strong. We delivered strong financial results and exceptional program performance for our customers. We also further strengthened our balance sheet with a $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 the Q&A session, I'm pleased to announce that we'll 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, hear from market line leaders, and participate in various Q&A sessions. We look forward to the event and your participation. Now, we'll open the line for questions.

Our first question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Thank you so much. Good morning, Chuck, George, and Carey. First question maybe George for you. 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 major moving pieces around working capital and if any one-off items there?

Yes, certainly, Sheila. As you indicated, we had a nice quarter and the third quarter builds on momentum with 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 significant strength from Critical Infrastructure in the fourth, including in the Middle East.

Okay, thank you. And then, maybe another question on the business just parsing out space and geospatial intelligence and cyber and Intel. Those 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, with the win rates and book-to-bill? Sorry if I missed it, and if you said it, I’m just trying to get a sense of the runway for growth.

Thank you, Sheila, and thank you for your questions. We're very bullish on our cyber and Intel and space and geospatial markets. Yes, those were obviously both helped greatly by the acquisitions of Polaris Alpha and OGSystems. Our win rates have been very strong, also enhanced by the larger contracts that we're winning than we had historically without the acquisitions that we've garnered. Carey 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 and our missile defense C5ISR unit going forward. Carey, any additional color you'd like to add to that?

Yes, Sheila. Under cyber and intelligence, we had growth on the Combatant Command mission support contract. And as I mentioned during the remarks, QRC's organic growth was the best it's been in the history of the company. We also had strong organic growth across the whole portfolio of C&I contracts, and our very strong win rates continue there. Within space and geospatial, there were two primary areas: one was our launch manifest system integration contract, and the second one was the T-REX 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.

Guys, the pipeline has grown pretty significantly over this year and over the last few years, and we haven't seen that convert to backlog yet. I know you discussed the dynamic of awarded, but unbooked value with contracts like CCMS. So I guess my question is, one, when would you expect to see that increase in the pipeline actually start to drive backlog growth; and two, is there any way to quantify that unbooked value?

Well, as we've mentioned in the past, Gavin, our approach on IDIQ contracts beats a single award or multiple award, is to book those very conservatively. So although we may have won a $1 billion contract or in the case of, say, CCMS, a contract worth north of $500 million. We're only booking it in pieces per year. Whereas I think some of our other companies in this space would book the whole item. What that gives us is that; one, we're never getting too far out in front of our headlights, but two, 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. We expect our backlog to continue to grow in the next 2 years at least, but that's where we've got some pretty good visibility. Carey, anything you'd like to add on that, regarding any of the specifics?

I agree with what you said, Chuck, and the two that I would point out in the cyber and intelligence that we're currently getting work on with the Combatant Command Mission Support contract. We very conservatively only book the base and option task orders there. The other one was a classified contract we booked last year, and we did receive task orders in the last quarter on that contract.

Okay. That makes sense. Quick clarification, what is the COVID revenue headwind in dollar terms this quarter?

Yes, if we look at COVID, it gets tougher to estimate, Gavin, because one, we're kind of comparing numbers to plan numbers. But you kind of spread it apart, you'd look at Federal Solutions, for example. They may be growing in the high single digits since COVID. And that's nominally a $50 million headwind that we're facing in that market, probably close to $75 million across the portfolio. So if that's a $50 million revenue headwind this year, and you haven't reduced your revenue guidance for the year, obviously, to your point that it implies much better core growth. Assuming that's a net impact and there's not some big tailwind from kind of COVID benefits that go away next year, should we think about you making up that full amount of COVID headwind on top of the core business growth continuing next year? Or is that double-counting growth next year? Yes, I think that's double counting. Here's the way I would think of it. Some of our contracts, like Antarctica, where they aren’t allowing us on the ice for a year. They've been fortunate to not have any COVID cases, and they want to keep it that way. The same is true for Kwajalein Island where the Marshallese made those same decisions. Both of those decisions we don't control. When they decide to allow us on the ice or when they decide to allow us back on the islands, think of it as we pick up where we left off and whatever the duration we were not on ice or on Island then extends 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 the appetite for additional M&A? Obviously, you have the capacity to do more on the balance sheet, but just from an internal bandwidth standpoint, should we assume that you all are done for a period until you digest what you've done or are you still 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 of what either accelerates or slows our acquisition assimilation is the quality of the companies that are out in the market space. As I've said in past calls, at any given time, we're talking to five to ten different companies, and we're primarily pulling out of our supply chain.

Got it. That's helpful. Could you provide some qualitative commentary on expectations for 2021, even if it's just directional revenue and margins?

Yes, we'll be announcing that with our Q4 earnings call, but I think the general takeaways are that we remain very bullish on the company and our markets, and we aren't seeing anything out of election day or anything else that gives us any pause for caution.

Okay. And then just as it relates to Braxton any dissynergies or overlap between the two businesses that could present some revenue dissynergies in the near term we should be aware of. Thank you.

Thank you. There are no dissynergies to report. We had a couple of very minor OCI contracts involving about five people, which have no significant effect on our revenue, profit, or integration. One of the advantages of Braxton is that there was minimal overlap, as we were working side by side. Now, we are stronger together.

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

Thank you. When you look at Braxton and the area in which it plays, what does the pipeline look like for RFPs, inasmuch as you're aware where the combination of the two companies may better situate you to win work, once the acquisition is closed?

The activity in the space market is currently very robust, largely due to the increasing number of lower orbit satellites being launched. There is also significant involvement from both private industry and governments, with countries like China expanding their efforts. From a national defense standpoint, we have numerous satellites in orbit being managed by various systems. An enterprise ground system, like the one Braxton develops, enables the defense department, NASA, and others to communicate and control these multiple systems from a single point. This area has already experienced substantial growth and is expected to continue expanding in the coming years. We are very enthusiastic about the opportunities in the space market.

Could you refresh us on the arc and pace of run-offs in the Critical Infrastructure unit, and sort of the time period of that being a headwind in your current thinking?

Yes. What we've been pretty consistent on is that we think in 2022, probably midyear, we'll have all of that off the books. The work we're booking now, including our latest big wins, are really, really margin-rich contracts. We continue to expect the margin to expand in critical infrastructure. We'll continue to grow that bottom line at a healthy rate. The top line will be muted as we said during the IPO, after that, running off that low-margin backlog. We should see the top line and bottom line growing at the same rate.

Last question for me. Could you speak to the medium and long-term financial impacts of what you've learned from the pandemic? Work-from-home, et cetera? Because there may be some benefits 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, whether that is better education over the ventilation systems or improvements to physical separation and better cleaning regimens. There are going to be a lot of modifications to physical infrastructure to improve distancing and cleaning and all of those kinds of attributes. The other thing that it's proven for our customers is that they can do a lot of things virtually in terms of controlling these networks. You can do it safely from a cyber perspective. Whether it's 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 pay-as-you-go basis. I’m very bullish on the infrastructure industry. We think it's going through a lot of transformation, which will 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.

Good morning, guys. A couple of quick questions. What is your organic growth, right? So if you back out all the acquisitions year-on-year, what is the organic growth and what would be your organic book-to-bill, if that makes sense?

Yes. Thank you, Ron. You look at our organic growth and as we said, going for sands COVID, our federal solutions unit is growing in the mid to upper single digits, and our Critical Infrastructure will be lumpy in the runoff of that work. Arguably, we're running that as a flat unit over a three to four-year period, and we're still on track to drive those to overall growth rates. COVID obviously had some impact. The good news there is the agility of the team to be able to pivot and to sell more products. They got GOTS products or COTS products, which may not be as material to the top line, but have had a very important impact on the bottom line as well as the pivot to more professional services and IT-oriented services in our Critical Infrastructure business.

Second question. With all the M&A you guys do, how do you measure that you're in fact creating value? A lot of times M&A doesn't. So what's your internal process to kind of gate check that we bought this for X, and it actually creates value for us?

That's a great question, Ron. One that our Board has been laser-focused on for the last 15 years, given that we are an acquisitive company. On a quarterly basis after we make an acquisition, we report back to the Board on the forecast we had made. We typically take the rates and plans of the companies put in, really ground truth those numbers, and develop our own set of numbers on what we think rates will be, growth rates, profit rates, etc. We track those for a year. After a year, it's very difficult to track those. As to your point, the synergies now you start winning jobs as a total Parsons entity, as opposed to a Polaris Alpha and OGSystems or Braxton. 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. The core businesses we've bought have generally been meeting their plans. So the net-net of all that is we've been creating more shareholder value out of those acquisitions that have helped compensate for things like COVID.

What do you look at, cash on cash returns, right? If you buy a business for $300 million bucks, when do you expect to get the $300 million back? Is it 3 years out, 5 years out?

Well, generally it's been more in the area of 3 to 4 years out. Cash on cash returns and they've generally all been margin accretive.

Got it. And then maybe one last one. I know there's a lot of uncertainty because of the election and so on and so forth. But you guys must have some sense of directionality into 2021. Can you share us some thoughts on that?

Yes. So, clearly, I think we and everyone else understands the priorities of the Trump administration fairly clearly. The challenge for us was to get a good line of sight on the Biden administration should it end up in a Biden Presidency. I spent quite a bit of time speaking with both sides of the aisle and Congress and Senate transition team members. What we came away with is their emphasis on national defense priorities are very aligned. The emphasis on the underlying technologies to help defend our nation are aligned. If there was one difference, it's that the Biden administration seemed to be more focused on a large infrastructure bill and how they would fund that and put that in place. To us, that was the primary difference. We remain very bullish regardless of how the outcome ends up.

Got it. Thank you very much.

Thank you, Ron.

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

Hey, good morning.

Good morning, Josh.

The margin-rich contracts you mentioned there in Critical Infrastructure, can you just give us some color there? What technology is driving that or geographies, where Parsons is winning?

Yes, that's a great question. There are really two things that drive the margin richness. One is the expansion of our underlying technology portfolio to include things like iNET or Intersection-as-a-Service, bringing technologies we've developed in Federal Solutions over. Secondly, there are phenomenal margins that we're generating out of Canada. That's due to our business model, but it's also a very infrastructure-rich environment. We have much less competition today than there was in the infrastructure market 5 to 10 years ago. As a result, margins have increased substantially in North America with a corresponding decline in risk transfer. We leverage our design expertise into outsized returns on some of these large infrastructure projects, and the latest one is a great example. Some of this goes through the books since we don't consolidate, as a lot of these are minority partnerships in joint ventures. That's what really gives the upside impact to our EBITDA margins.

And then just long-term COVID changes. They talk about work-from-home, more comfort from the customer. Is there any way you're willing to put some estimate on maybe your real estate footprint consolidation? We've heard from others in the industry some pretty large assumptions. Is there any way you're able to put a finer point on that?

Yes. You accurately captured the situation regarding real estate leases and related IT costs. We anticipate that our workforce will divide into three categories. This won't necessarily be equal thirds, but rather three distinct groups. The first group includes employees who will return to work full-time in our offices, either based on their own preferences or dictated by customer needs for collaboration and daily interactions. The second group will opt for permanent remote work, having already been inclined toward this due to factors like childcare or caring for aging parents, and we are equipped to support that since we've successfully managed it for the past seven months. Finally, the largest segment of our workforce will likely choose a hybrid model, where they may work in the office three days a week and from home for the other two days. Overall, this transition will contribute to a decrease in real estate costs, although we won't see immediate savings due to existing leases typically lasting three to four years. However, we expect our real estate expenses to decline annually as we become more efficient with our overhead spending. If I had to estimate, I would project a reduction in the range of 40% to 50% on the high end and around 30% on the more conservative side. Those are the estimates I am considering. George and I are currently focused on our financial planning.

And then just one on Braxton. How does it fit into the SaaS conversation? And then, how much of it is focused on hardware versus software?

Yes, so Braxton is a very product-rich company, albeit most of it is GOTS (government off-the-shelf) products. They do have a very successful COTS product, commercial off-the-shelf, that's right around a little less than 10% of revenues. A lot of this is dependent on what we think is going to take shape in an emphasis by federal government customers to drive more efficiency in their contracting means and methods, and improve their use of taxpayer dollars. In that regard, a lot of these products do hold SaaS potential. We're building our portfolio of products that we can take into a SaaS model and it will be getting the government to actually change their contracting methods. In the meantime, we can sell them as COTS products off-the-shelf, and those carry much, much higher margins.

Great. Thank you for the time.

Thank you.

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

Yes, thanks so much. So most of your peers who have already reported have indicated favorable indirect expenses as a result of COVID. The three things they mentioned are less travel expense, less medical expense, because people are scared to have elective surgery in the hospitals due to COVID, and less vacation paid time off and hence higher labor utilization. Could you comment on the potential positive impact from COVID on your business, and what you saw in the third quarter?

Yes. Since COVID began, we've obviously seen reduced travel, Cai. I'm sure that's true for almost every business. Bad for the travel industry, but good for the overhead of other companies. We've seen medical costs decline as well as fewer folks doing elective surgeries or going into their doctor visits. Vacation is probably off a bit. Although I think we have seen, and we've tried to promote people 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 at Fed Solutions was down not only year-over-year, but was down sequentially.

Yes, a lot of that, Cai, 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, and this year’s come off of some of the chemical weapon demilitarization work that we've done. Those episodic award fees, when they hit, have a big determination on that multiple. The good news is that the margins are increasing steadily over time with the core Federal Solutions market as we run off more of that pass-through revenue, out of engineered solutions predominantly. We are garnering a fixed price level of effort work and greater product sales.

Great. And then, you mentioned in terms of new opportunities that you have a likely major subcontractor to Northrop on GBSD. You also had, I believe it was called DetectWise, a portal to detect COVID at airports. Could you comment on those two opportunities?

Sure. Yes, obviously, Northrop Grumman has signed their contract. We're in discussions with Northrop. The initial focus is getting the missiles themselves worked out and prototypes in manufacturing. We continue to work on areas of our predominant expertise around blast systems, hardened systems, communication systems, and the like. We fully expect to be under contract sometime in Q4, maybe early Q1 next year. Just reminding 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 DetectWise, we will continue to make sales, including at airports as you pointed out. Several other industrial and infrastructure customers continue to make sales on a weekly basis and those sales are growing. Again, I'm not sure that that will ever be material, but it showed the resiliency and, quite frankly, gave a huge jumpstart to our program to launch a new product quarter. What we're seeing now are new products coming out of our cyber and intel group, our space-geospatial group, and the new software products for missile defense teams. Those are right down the middle of our market focus.

Thanks so much.

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

Chuck, George, Carey, and Dave, good morning.

Good morning, Louie.

Chuck, you and Carey referenced several recent defense wins, including the Cyber Combatant Command and the use of commercial off-the-shelf software. I'm under the impression that Parsons developed the sensor ingestion software for the Army's high-profile distributed Common Ground System program. This program is high-profile because it involves the convergence of several high-growth areas like data analytics, AI, and software development. So are you able to broadly discuss Parsons' software data analytics capabilities? I'm asking because there are several other programs in the pipeline that you're involved with, such as the Air Force Advanced Battle Management system. So I'm just wondering how you're positioned in these high-growth areas. Thanks.

That's a great question. I'll start with an initial response and then have Carey add more detail. Data analytics is a vital strategic asset for us. When we discuss artificial intelligence, high-speed processors, hardware development, and the data analytics we offer, we're focused on transforming large volumes of raw data into informative insights through analytics via high-speed processors. Ultimately, we turn that information into actionable knowledge using our AI algorithms. This capability is crucial across all our market sectors and is essential for the new large programs emerging. Additionally, I want to highlight our work in electromagnetic warfare, especially in high-end lasers. Our ZEUS laser system, which is integrated into our RADBO products, exemplifies this. Carey, would you like to elaborate further?

Yes, we've been the Army's mission 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 feeds and plots that data into the appropriate battlefield operating systems for the operational side of the Army. As you mentioned, Parsons did develop the sensor ingestion software for the Distributed Common Ground System-Army. Our software is responsible for standardizing all the incoming sensor data, including the integrated sensor architecture messages that we format into the DCGSA system to be able to easily process and analyze that. That is critical in helping the Army and Department of Defense mine the data and track the insurgents. We are also involved in big data platforms in other areas, including the Defense Cyber Mission Operations program, where we serve as the lead systems integrator for the Army on the DCO. I would also want to point out in the Critical Infrastructure area, we do a lot of data analytics. If you look at our intelligent network system or the work that we're doing in the tooling market with our partner Neology.

Thanks, George and Carey. I'm sorry, thanks, Chuck and Carey. George, I was wondering, and this might be a question better for the Analyst Day, but are you able to ballpark quantify what the Critical Infrastructure margin would be today if you didn't have the low margin contracts that you expect to turn off by the middle of 2022?

Yes, I'd say at this point, it would go up moderately. But as Chuck suggested in response to an earlier question, a good part of that runoff has already occurred. I would put a number on it; it might be another 50 basis points.

Sounds good. Thanks, everybody.

Thank you.

Thank you, Louie.

Hi, thanks. Chuck, you mentioned earlier kind of still being in the M&A market. Can you remind us where you're willing to take the balance sheet? Should we assume that using equity is off the table or not necessarily to just kind of in the context of the convert? I know that wasn't particularly dilutive, but I just want to get your view on use of equity and M&A going forward. Thank you.

Yes. Thank you, Joe. In terms of the last part of that question, first, I think the kinds of acquisitions we're looking at are going to be cash-based acquisitions. If we were to contemplate some sort of large transformative deal, I don't think I would take equity off the table. But certainly on the types of deals we've historically done and the kinds of deals that we're looking at today. In terms of market areas, cyber and intelligence, space and geospatial, missile defense, C5ISR, and our Connected Communities work where we're doing advanced electronics and software and hardware development for infrastructure, and then in terms of areas and technologies, we're investing in areas that benefit from our work or add to our capabilities in artificial intelligence, including high-speed processing and data analytics, cloud computing, predominantly migration of large platforms to the cloud and creation of new cloud applications. The autonomous systems we include kind of hypersonics, whether that’s air, sea, land or space, and lastly IoT, whether it's our PeARL Flash Geospatial Sensors or QRC radio frequency sensors and processors, all the work that we do around IoT in terms of creating new data streams and analyzing and processing those data streams.

That's all the time we have for questions today. I'd like to turn the call back to Dave Spille 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. We look forward to speaking with many of you over the coming weeks. With that, we will 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.