Earnings Call Transcript - PSN Q1 2026

Operator, Operator

Thank you for standing by, and welcome to Parsons Corporation's First Quarter 2026 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, David Spille, Vice President, Investor Relations. Please go ahead, sir.

David Spille, Vice President, Investor Relations

Good morning, and thank you for joining us today to discuss our first quarter 2026 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Carey Smith, Chair, President and CEO; and Matt Ofilos, CFO. Today, Carey will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our first quarter financial results as well as a review of our 2026 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 Form 10-K for fiscal year ended December 31, 2025, 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 the comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. And now I'll turn the call over to Carey.

Carey Smith, Chair, President and CEO

Thank you, Dave. Good morning. Welcome to Parsons' First Quarter 2026 Earnings Call. I want to begin by recognizing the dedication and performance of Parsons' more than 21,000 employees who delivered a strong start to the year. Most importantly, I'm pleased to share that our 7,500 team members in the Middle East region have remained safe during the current regional conflict. They've shown tremendous resilience in managing volatility while continuing to deliver our customers' critical missions. As we'll discuss later in the call, our Middle East business produced solid financial results this quarter, and I am very proud of what the team has achieved. As demonstrated by the current military operations, our differentiated solutions spanning cyber, electronic warfare, air-based defense, counter-manned aerial systems and intelligence and operations centers are vitally important to protecting both our nations and our allied security. Post conflict, Parsons is prepared to support the Middle East on its path to recovery by providing essential capabilities, including critical infrastructure protection, air-based defense, integrated air and missile defense, transportation solutions and the reconstruction of conflict-affected areas. We believe Parsons is well positioned to advance allied priorities with our nearly 70 years in the region, extensive footprint and performance reputation. We are proud of the work we do in defense, security and infrastructure for our global customers. The first quarter highlighted the resilience of our business and our team's high level of execution as we delivered our highest adjusted EBITDA margin ever, reached record levels for both total and funded backlog, achieved a robust book-to-bill ratio of 1.4x in both segments and generated record first quarter cash flow. Revenue performance was in line with our expectations, and we continue to complement our organic growth with strategic accretive acquisitions that enhance our differentiation and drive long-term shareholder value. Looking at our first quarter financials in more detail, total revenue increased by 8% and organic revenue grew 3%, excluding our confidential contract. This total revenue growth was driven by 12% growth in our Federal Solutions segment and 3% growth in Critical Infrastructure. Our record adjusted EBITDA margin of 10.1% was driven by a 10.8% margin in Critical Infrastructure, marking our highest first quarter performance in that segment. The 50 basis points of margin expansion at the corporate level in Q1 builds on the 40 basis points of expansion we delivered in the first quarter of 2025. In addition, we significantly exceeded our cash flow target and closed the quarter with record total and funded backlog of $9.3 billion and $6.6 billion, respectively. On the bookings front, contract awards increased 17% year-over-year, resulting in a strong book-to-bill ratio of 1.4x. Our Critical Infrastructure segment reported a book-to-bill of 1.4 for the quarter, marking 22 consecutive quarters above 1.0. Performance in the Middle East was outstanding with a book-to-bill ratio of 1.5. In Federal Solutions, contract awards increased 38% year-over-year, resulting in a book-to-bill ratio of 1.4x. These strong bookings provide a foundation for continued organic growth in both segments. A key driver of our future performance is the strategic importance of our contract wins. During the first quarter, we secured 4 single-award contracts valued at more than $100 million. These included a $593 million contract extension under the Federal Aviation Administration's Technical Support Services, or TSSC 5 contract, with $410 million booked in Q1. This award exercises the first option period, extends performance through 2030 and supports the FAA's aviation system capital investment plan. TSSC 5 has a $1.8 billion ceiling value with a 4-year base period and two 3-year option periods. We received a production award notification from the United States Cyber Command for the Joint Cyber Hunt Kit solution, a new sole-source contract with a ceiling value of up to $500 million with $250 million booked in Q1. Importantly, this contract was another transaction agreement, which allows for faster, customized and collaborative industry partnerships. Parsons is an industry leader in the use of these rapid delivery vehicles. We were awarded a new 5-year contract valued at over $340 million to provide program management services for a major transportation project in the Middle East, booking over $300 million in Q1. Our transportation work in the region spans rail and transit, roads and highways, bridges, airports and intelligent transportation systems. We were awarded more than $145 million under the GARDEN contract. Under these task orders, Parsons will enhance command and control, space and intelligent surveillance and reconnaissance technologies for the Air Force and other federal customers. We will develop and sustain next-generation software, deliver on-site training and rapidly deploy advanced mission applications. We booked $38 million on these contracts during the first quarter. We also received an additional $150 million on two contracts to continue serving as the main construction manager for remediation projects on the Faro and Giant mining programs in Canada, two of the largest and most complex mine reclamation projects in the world. We booked the full amount on these contracts during the first quarter. After the first quarter ended, we received four more strategic federal awards previously unannounced. First, we were awarded $400 million for two other transaction agreements, each having a 3-year period of performance. This new work shows the continued demand for our mission-critical defense and intelligence capabilities and our ability to deliver solutions to our national security customer base rapidly. Next, we were awarded a single-award classified IDIQ contract with a ceiling value of $184 million over 7 years that represents entirely new work for the company. We were awarded this contract based on our differentiated technology, including our unique biometrics capabilities. And finally, we were awarded an $87 million increase on an existing national security prime contract. Importantly, in all of our Federal Solutions wins, we are leveraging our artificial intelligence capabilities to enhance our solutions and create differentiated outcomes. I would now like to highlight some additional accomplishments during this quarter. We closed our acquisition of Altamira Technologies Corporation in an all-cash transaction valued at up to $375 million. Altamira advances high-priority national security missions supporting intelligence community and Department of Defense customers by providing multi-intelligence technology solutions and performing critical operations. Altamira expands Parsons' market presence in signals intelligence, missile warning, space and foreign military exploitation and adds critical customer depth with the National Air and Space Intelligence Center, National Security Agency and other classified intelligence customers. We were named one of the World's Most Ethical Companies by Ethisphere for the 17th consecutive year, and we were honored for our project excellence on two major infrastructure initiatives. In Georgia, our team received the Engineering Excellence Honor Award from the American Council of Engineering Companies for the ARS Mill ramp extension in Cobb County. Internationally, we were recognized with the Refurbishment and Retrofit Project of the Year at the Big Project Middle East Awards for our work on the King Abdullah Financial District residential uplift project. Looking forward, we are optimistic about Parsons' future. The synergies between our Critical Infrastructure and Federal Solutions segments across six growing, profitable and enduring end markets set us apart and create significant opportunities for us to meet or exceed our financial goals. In Critical Infrastructure, we continue to see strong demand in both North America and the Middle East. Our focus on hard infrastructure — roads and highways, bridges, airports, rail and transit and intelligent transportation systems — is aligned with the spending priorities in these geographies. Also, there's a need for urban development, support to major events and advanced manufacturing that match our core competencies. Our number-one ranked program management, number-three ranked construction management and AI-enabled solutions underpin our success. While we continue to monitor geopolitical developments, including the ongoing war in Iran, our momentum and our customers' commitments to advancing their projects forward give us confidence in continued growth. Although our business has not been affected by the conflict to date, our customers remain focused on ensuring their budgets are aligned with the right priorities and their programs are properly phased. Across the Middle East, the emphasis on diversifying economies, hosting major global events and addressing defense, security and infrastructure requirements is expected to continue driving demand for our expertise. Turning to Federal Solutions. We are encouraged by the momentum in United States defense spending. In fiscal year 2026, $1 trillion has been appropriated for defense, and we're beginning to see funds flow from both the base budget and reconciliation funding. For fiscal year 2027, the administration has submitted a $1.5 trillion defense budget comprising a $1.15 trillion base and $350 billion of reconciliation funding. This proposed 44% increase over current funding levels, which is focused on modernization, would represent the largest defense budget in history. The fiscal year 2027 budget presents substantial opportunities for Parsons that are closely aligned with our strengths, including missile defense, cyber, space, counter-unmanned aerial systems, electronic warfare, facilities modernization, critical minerals, countering weapons of mass destruction and joint all-domain command and control. Our purpose-built Federal Solutions portfolio is aligned with our nation's defense and security priorities. And because of our strategic acquisitions and sustained research and development investments, we've built differentiated capabilities that help safeguard our nation and outpace evolving threats. We are encouraged by the strong bipartisan commitment to increasing U.S. defense spending in response to the evolving global security challenges. Our leading indicators, including our $54 billion pipeline, strong win rates of 60%, total backlog of $9.3 billion, of which 71% is funded, and our $11 billion of contract wins not yet booked, give us confidence that we will continue to remain an industry growth leader, excluding the impact of our confidential contract in both segments. We operate in two large and well-funded segments across six end markets, and our favorable financial outlook is supported by our proven execution and effective capital deployment. We are reaffirming our 2026 guidance ranges, which Matt will review shortly. In summary, we had a strong start to the year, delivering new records for adjusted EBITDA margin and total unfunded backlog, exceptional book-to-bill ratios in both segments and record first quarter cash flow. Our operational discipline, strategic contract wins and additional corporate achievements reinforce our position as an industry leader. We remain optimistic about our future and are confident in our ability to drive long-term shareholder value. With that, I'll turn the call over to Matt to provide more details on our first quarter financial results. Matt?

Matt Ofilos, CFO

Thank you, Carey. We've started 2026 with solid results and favorable forward-looking indicators towards future growth. With a strong book-to-bill in both segments, record adjusted EBITDA margins and our highest total and funded backlog to date, we are well positioned to deliver for our customers and shareholders. We continue to effectively deploy capital, investing in strategic acquisitions, internal research and development and increased share buybacks, all to support long-term growth and create shareholder value. Turning to the details of our first quarter results. Total revenue grew 8% and 3% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection, space and missile defense and transportation markets. Highlights included strong growth on key contract drivers for the year, such as Airbase Air Defense and the FAA TSSC 5 contract. Total revenue, including the confidential contract, decreased 4% from the prior year period and was down 8% on an organic basis. SG&A expenses for the first quarter increased 10% from the prior year period, primarily driven by costs related to recent acquisitions and higher transaction expenses. Record first quarter adjusted EBITDA of $151 million increased 1% from the prior year period. Adjusted EBITDA margin expanded 50 basis points to a record 10.1%. These increases were driven by improved execution and contributions from accretive acquisitions. I'll turn now to our operating segments, starting first with Critical Infrastructure, where first quarter revenue increased by 3% from the first quarter of 2025. This increase was driven by organic growth of 2% and inorganic revenue contributions from our TRS and Applied Sciences acquisitions. Organic growth was primarily driven by strength in the global transportation markets. As a reminder, Middle East revenues were negatively impacted by the number of work days in Q1 given the holiday schedule compared to 2025. We expect this to resolve in Q2 where there are three additional workdays compared to the prior year. Critical Infrastructure adjusted EBITDA of $79 million increased 8% from the first quarter of 2025 and adjusted EBITDA margin expanded 50 basis points to 10.8%. Both adjusted EBITDA dollars and margins were first quarter records for Critical Infrastructure. These increases were driven by the ramp-up of recent awards, accretive acquisitions and strong program execution. Moving to our Federal Solutions segment. Our first quarter revenue increased 12% and 4% on an organic basis, excluding the confidential contract. These increases were driven by growth in our critical infrastructure protection space and missile defense and transportation markets. Total Federal Solutions revenue, including the confidential contract, decreased 10% from the prior year period and 17% on an organic basis. Federal Solutions adjusted EBITDA decreased 5% from the first quarter of 2025, while adjusted EBITDA margin expanded 40 basis points to 9.4%. The adjusted EBITDA dollars were primarily impacted by lower volume on the fixed-price confidential contract. The adjusted EBITDA margin increase was primarily driven by accretive contract growth and acquisitions. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q1 2026 was 72 days, a 14-day increase versus the prior year period. This increase was primarily driven by lower volume on the confidential contract and timing of collections in the Middle East. During the first quarter of 2026, we used $4 million of operating cash, which was an $8 million improvement from the prior year period. Capital expenditures totaled $15 million in the first quarter of 2026. Looking ahead, we expect CapEx spend to ramp in Q2 as investments in classified facilities and upgrades to our enterprise systems accelerate Parsons' long-term growth and drive greater efficiency throughout the business. Trailing 12-month free cash conversion was 102%, reflecting our disciplined focus on contract execution and collections. Our balance sheet remains strong as we ended the first quarter with a net debt leverage ratio of 2.0x. This includes the impact of the upfront cash consideration of $330 million for the acquisition of Altamira in the quarter. During Q1, we repurchased approximately 583,000 shares for an aggregate purchase price of $35 million. Turning next to bookings. In the first quarter, we secured $2 billion in contract awards, a 17% increase year-over-year, driving a strong enterprise book-to-bill ratio of 1.4x. On a trailing 12-month basis, our book-to-bill stood at 1.1x, which extends our track record of a trailing 12-month book-to-bill above 1.0 for every quarter since the IPO. Both segments reported a book-to-bill ratio of 1.4x for the quarter. Our Critical Infrastructure segment continued its impressive streak with its 22nd consecutive quarter above 1.0, with particularly outstanding performance in the Middle East, where we achieved a book-to-bill ratio of 1.5x. In Federal Solutions, contract awards increased 38% year-over-year. Our backlog at the end of the first quarter totaled $9.3 billion, a 3% increase from the prior year period. Funded backlog of $6.6 billion remains the highest since our IPO and increased 7% year-over-year. At the end of Q1, our funded backlog represented 71% of total backlog. Now let's turn to our guidance. We are reiterating our 2026 guidance ranges provided on February 11 and based on our financial results for the first quarter of 2026 and our outlook for the remainder of the year. These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website. On Slide 11 of our PowerPoint presentation, we also include other key assumptions in connection with our 2026 guidance, including quarterly cadences. 2026 guidance reflects the evolving budget environment, a competitive labor market and the reality of a challenging government procurement landscape. While these factors present challenges, we're also benefiting from tailwinds, including unprecedented global infrastructure spend, a federal portfolio that's tightly aligned with the administration's priorities, recompete risk of less than 3% of 2026 total revenue and a record $9.3 billion in total backlog, including our highest funded backlog ever. On top of that, we have $11 billion in awarded contracts still to be booked, which further strengthens our outlook. We've lowered second quarter expectations due to the timing of recent wins. However, we continue to believe strong backlog and recent awards are supportive of growth projections in the full year guidance. In summary, we delivered strong results for adjusted EBITDA margins, contract awards and total and funded backlog, and our revenue was in line with expectations despite a complex global environment. We can continue to deploy capital effectively, investing in organic growth opportunities, acquisitions and share repurchases to support our growth strategy. All of this reflects our disciplined execution, and we remain confident in our ability to achieve commitments and create long-term value for our shareholders by delivering critical capabilities for our customers around the world. With that, I'll turn the call back over to Carey.

Carey Smith, Chair, President and CEO

Thank you, Matt. This quarter's results underscore the strength and durability of the Parsons portfolio with a robust pipeline, high win rates, strong book-to-bill performance in both segments, record levels of total and funded backlog and $11 billion in contract wins awarded yet to be booked. We are confident in our outlook. With that, we will now open the line for questions.

David Spille, Vice President, Investor Relations

Certainly. And our first question for today comes from the line of Sangita Jain from KeyBanc.

Sangita Jain, Analyst, KeyBanc

First off, Carey, it's really good to hear that all your Parsons team members are safe and you had very strong first quarter results. Can you elaborate on some of the conversations you may be having with your customers about the balance between the short-term disruptions and the long-term opportunity?

Carey Smith, Chair, President and CEO

Certainly. Thanks, Sangita. I appreciate your question. As you mentioned, our first concern is always for the safety and security of our employees, and all 7,500 are safe and secure. Most importantly, all the employees are working on the job sites and in the offices. We really have not seen an impact to date. I will point out, too, the conflict has not delayed any of our funding. The Middle East exceeded their first quarter cash forecast. We have not seen any slower contract awards or paused negotiations; that's clearly reflected by our strong 1.5x book-to-bill. And we've not had any force majeure insurance claims. One thing that's good about our portfolio is that no Middle East program represents more than 1.6% of our revenue, and we have 20% of Middle East backlog. The contracts are long in duration as well. The average contract duration is 4.7 years and 49% of our revenue is tied to long-term frameworks, and we're clearly holding our full year guidance for the Middle East of 8.5% organic growth. What we're seeing, Sangita, is many of the GCC countries are using periods of higher oil prices to fund diversification into non-oil sectors and advanced technologies such as artificial intelligence and digital infrastructure so that they're less vulnerable to future price swings. I do want to point out that post conflict, we believe there will be significant investment in areas including redundancy and resiliency. So not only will Parsons be doing our traditional areas of transportation, water and environment and urban development, but we're going to expand into prioritized areas including integrated air and missile defense, border security, counter-unmanned air systems, critical infrastructure protection, water security and desalination, rail, pipeline security and rebuild opportunities. There's also a priority to take key assets into hardened underground facilities such as data centers, treatment plants and military assets. We also reported that defense spending in the Arabian Gulf is expected to rise by 20% over the next three years.

Sangita Jain, Analyst, KeyBanc

That's super helpful, Carey. And maybe one for Matt. Can you talk about some of the puts and takes that went into your guidance since your Federal Solutions margins have recovered really well and your Critical Infrastructure margins are very strong, but you decided to keep the full year margin outlook unchanged. Can you help us walk through that?

Matt Ofilos, CFO

Yes. Thanks, Sangita. So to your point, really strong Q1 at north of 10% margin, 10.1%. CI now has five straight quarters north of 10%. So the performance here has been really strong. Obviously, it's still early in the year. Our full-year midpoint expectations incorporate some conservatism. Federal is 9.4% in Q1; our target for the year is mid-to-high single digits to low double digits, given the mix dynamics. Infrastructure midpoint is around 10.5%, so 10.8% to start the year is a little bit better than total year expectations. But early in the year, we will expect within Federal some additional growth and cost types. We've talked previously about mix being always the biggest driver to Federal margins. On the infrastructure side, we had a little bit lighter pass-throughs and materials in Q1, which helped margin. So there's a little bit of pressure there in other quarters. Again, early in the year, a great start, but we'll watch over the next couple of quarters.

David Spille, Vice President, Investor Relations

And our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Sheila Kahyaoglu, Analyst, Jefferies

Maybe Carey, can you just talk about the first half versus the second half growth trends? What's really driving the upswing in the second half and some of the major program drivers there?

Carey Smith, Chair, President and CEO

Yes. Thank you very much, Sheila. We anticipate both segments to grow in the second half of the year. What's driving it? Let me start with Federal — it's the new awards. We just highlighted the four awards, three of which were federal that occurred during Q1 and then the four awards that have already occurred after Q1 ended. So very strong start to the year for Federal — also seeing significant growth on FAA. FAA achieved 25% growth in the first quarter, and we expect the FAA to be strong throughout the year. Besides the awards I mentioned, areas such as munitions, Holston and Radford programs are ramping up. Also, a lot of classified work and other transaction agreements, and our Missile Defense and hypersonics teams' contract, which we expect to achieve over 10% growth this year as we're supporting important programs. Within Critical Infrastructure, I mentioned the Riyadh metro, so we expect that to ramp up in the latter half of the year. Within the North America group, we expect P3s, particularly on the East Coast, to ramp up. We also had recent wins on the West Coast, including the LA Metro line A extension, I-70 in Missouri and the Silver Line in Texas. In the Middle East, a couple of projects to highlight would be Entertainment City as well as King Salman International Airport.

Matt Ofilos, CFO

Yes. And Sheila, the only other one I would add is the Joint Cyber Hunt Kit program through the other transaction authority. That program has an LRIP phase now and transitions to production later in the year, so the second half will have more production deliveries and associated revenue.

Sheila Kahyaoglu, Analyst, Jefferies

Got it. And maybe to follow up, Matt, on that. You said Q2 is a little bit lower given award timing. Can you just give us a little bit more color on that? What are you seeing in the outlay environment? Why was it lower?

Matt Ofilos, CFO

Yes. Some of the awards that Carey highlighted came in later than we originally expected — they were expected earlier in the year, in January and February. Additionally, some phasing within the Middle East — the Middle East makes up about half of the reduction to Q2. That's really just phasing as we see the customers' prioritizations. The second half ramp on those awards will benefit the Middle East business. Overall, the reductions are really phasing and timing of awards.

Carey Smith, Chair, President and CEO

And it's super exciting to see the federal momentum that we had.

David Spille, Vice President, Investor Relations

And our next question comes from the line of John Godyn from Citi.

John Godyn, Analyst, Citi

Maybe we could just revisit the $1.5 trillion budget. You described it as a generational investment, well aligned with the Parsons portfolio. Could you just elaborate on what's most exciting there for you? And then a quick follow-up: any thoughts on how that may play out as it moves through the process?

Carey Smith, Chair, President and CEO

Yes. Thanks, John. I appreciate the question. It is exciting and it's been recognized on a bipartisan basis that we're facing the most complex and dangerous threat environment in our nation's history. The budget is focused around three pillars, and I'll hit on where Parsons plays in each. The first is supercharging America's defense and industrial base — that includes shipbuilding and air power, and also within that pillar is a focus on critical minerals onshoring and energy independence and emerging technologies, both areas where Parsons plays. The second pillar, securing America's military advantage, is particularly important to us. Counter-unmanned aerial systems and air dominance will see increases. Cybersecurity funding is expected to increase meaningfully. There's major investment in artificial intelligence and joint all-domain command and control. There's a significant hike in both procurement and research, development and technology overall, particularly in space, which could be more than double the 2026 enacted level for certain programs. Missile Defense agencies are prioritized, and programs such as those we're supporting would benefit. The third pillar focuses on improving the military posture and infrastructure; we play in modernizing nuclear command, control and communications and in improving infrastructure for our reserves and facilities modernization. Overall, the increases in procurement and R&D create substantial TAM increases aligned with our portfolio. On timing, it's not yet certain; there is ongoing reconciliation discussion. We expect steps on reconciliation to progress in the near term, but the ultimate timing and size are subject to negotiation between the House and Senate.

John Godyn, Analyst, Citi

That was excellent. And if I could ask one totally separate question on M&A. You guys closed three deals in the last 12 months and a relatively large one recently — can you refresh us on M&A pipeline thoughts from here? How should we think about the M&A strategy over the next 12 to 24 months?

Carey Smith, Chair, President and CEO

Yes. Thanks, John. M&A remains our number-one focus for capital deployment. As you mentioned, we closed three deals last year and one in the first quarter of this year. We anticipate this year will close between two to four deals — we have a strong pipeline in both Federal and Critical Infrastructure. We continue to target companies that grow revenue greater than 10% and deliver greater than 10% EBITDA margins. We prefer preemptive deals with companies we know well and have worked with, with similar mission and culture, to improve integration success. You can expect continued focus of our capital on M&A. It's been a significant differentiator for the company; many of the federal wins I cited result from revenue synergies we've driven across the federal business.

David Spille, Vice President, Investor Relations

And our next question comes from the line of Andrew Wittmann from Baird.

Andrew J. Wittmann, Analyst, Baird

I just wanted to understand the quarter a little better. The holiday timing in the Middle East — how did that affect results? Can you quantify the effect on growth in the CI segment for the quarter? And how much of the benefit you're going to pick up in the second quarter?

Matt Ofilos, CFO

Yes. It was about three workdays from Q1 to Q2. Think of it as $10 million to $15 million of impact. So we had a little headwind in Q1. A positive is that when we originally guided to Q1 for the Middle East, we were expecting flattish to down a bit. It actually came in up 2.5%. So a strong start to the year for the Middle East and some tailwinds into Q2.

Andrew J. Wittmann, Analyst, Baird

Got it. And then, Carey, on the $11 billion of awarded but unbooked, that number has been pretty steady. Is that getting worked down and then replenished? Or is it kind of stagnant? I'm curious about the dynamics there.

Carey Smith, Chair, President and CEO

Great question, Andy. What we did is we moved some FAA work, which we expect to recognize over time — for example, we booked about $410 million on the FAA extension. That moved the timing of booking. As you saw by announcements we've made and wins post-Q1, we're going to be well over prior levels. Look at book-to-bill ratios: they're very strong again across the board — 1.4 for Parsons, 1.4 for Federal and Critical Infrastructure — and our backlog is $9.3 billion. Add the $11 billion of awarded but unbooked, and that number will be replenished by new awards.

Andrew J. Wittmann, Analyst, Baird

Okay. One final thing. On cash flow, your contract assets or unbilled work are up. Is this certain types of work being performed in greater amounts today? Is it a geographic thing? DSOs are up a bit. Just digging into those working capital pieces would be helpful.

Matt Ofilos, CFO

Good question, Andy. DSO was up about 14 days. Overall, really happy with the cash performance in Q1. We do have higher balances, and a lot of it is related in the federal business to milestones on some of the munitions projects that will deliver over the next two quarters. So I expect collections to come in over the next two quarters. I don't think DSO will continue to expand. When we get into production on the Cyber Hunt Kits, we may have some fluctuation, but not to the same scale. So the biggest driver has been the munitions programs and the upcoming milestones there.

David Spille, Vice President, Investor Relations

And our next question comes from the line of Gavin Parsons from UBS.

Gavin Parsons, Analyst, UBS

Carey, how big is your UAS business? And are you seeing any accelerated procurement yet given Middle East learnings?

Carey Smith, Chair, President and CEO

Yes. We have two components in UAS. One is our non-kinetic business, which mostly goes through the Army programs and is deployed in the Middle East right now. The second part is our drone arm, which is a system of systems at technology readiness level 9 that's been deployed; it is currently deployed in Laredo on the southern border. If I pull those two components out, I would estimate roughly $100 million in annualized revenue today. Yes, we see growth prospects in the Middle East. We were brought in to fix another company's system that was not performing; our system replaced that and there's ongoing demand. We also see demand within the United States; there are procurements pending at DHS and Customs and Border Protection and the Coast Guard.

Gavin Parsons, Analyst, UBS

The Air-Based Defense contract, I think, might also fall in that category. Is that just Europe and Africa? Are there other geographical opportunities?

Carey Smith, Chair, President and CEO

Yes, that's a great point, Gavin. The Air-Based Defense work is defense-focused, roughly $1 billion over five years, and we're on a run rate to achieve that. Air-based defense opportunity is much higher. We think air-based defense will continue to increase in the region as well as in the Indo-Pacific. Our contracts within Europe have rapidly expanded and are being used operationally.

David Spille, Vice President, Investor Relations

And our next question comes from the line of Gautam Khanna from TD Securities.

Gautam Khanna, Analyst, TD Securities

I was wondering what's the latest on the FAA program, the TSSC 5 extension. Has much work come your way yet and what's your latest expectation on that?

Carey Smith, Chair, President and CEO

Yes. To recap, we've been supporting the FAA for over five decades and on the technical support services contract for 24 years. The FAA issued our extension for three years, one full year early, indicating their intent to fully use that contract. Under that contract, we provide engineering and design support, installation, integration services, project and construction management and technical logistics and field support. We've supported about 1,000 FAA sites and have people embedded across facilities and equipment work across the national airspace system — radars, navigation aids, communications, surveillance, automation towers, terminal radar approach control, en route traffic control centers and much more. Our FAA revenue is projected to grow at roughly 25% this year on the TSSC contract; we were at 25% in Q1. We also had additional growth in areas like voice communications switches and some contracts outside the TSSC, putting us around a 35% growth rate in total FAA-related work. In addition to legacy work, we're starting to perform work for the implementation of the new air traffic control system, including voice communication, automation and training systems. We've been working closely with Peraton and the FAA and have an associate contractor arrangement, and the FAA and Peraton continue to use Parsons as an implementer for that work.

Gautam Khanna, Analyst, TD Securities

And I just wanted to circle back to the Q2 commentary. You mentioned bookings have been pretty strong to start the quarter. What would you expect book-to-bill could be in the second quarter based on what's in the pipeline and what you've already been awarded?

Matt Ofilos, CFO

Really strong start to the year. We are expecting north of 1.0 again at the Parsons level in Q2.

Gautam Khanna, Analyst, TD Securities

Okay. And within the segments, is any SKU particularly strong relative to the other?

Matt Ofilos, CFO

Not really. I think both segments will be around 1.0 or better. I don't think we'll see another 1.4 necessarily in every segment, but both are in a good place to be north of 1.

Carey Smith, Chair, President and CEO

And again, Critical Infrastructure has 22 consecutive quarters greater than 1.0 book-to-bill, and our trailing 12 months as a company has been over 10% adjusted EBITDA since the IPO.

Gautam Khanna, Analyst, TD Securities

Great. And then you touched on the Middle East business being resilient. At what point would you start to worry about disruptions? Does it disrupt the pace of contract awards? I know you mentioned long-duration backlog, but at what point should we worry?

Carey Smith, Chair, President and CEO

Again, we are not worried at this point. The work we're performing there is critical infrastructure. We've added additional defense capabilities supporting current operations. Sixty percent of our Middle East work is in Saudi Arabia. The Public Investment Fund just released their priority six ecosystems this week — tourism, travel and entertainment, urban development, advanced manufacturing, industrial and logistics, clean energy and NEOM — and we play in every one of those areas. They reiterated maintaining giga projects; I don't see cancellations, only minor rephasing. They need to be on the world stage for events like Expo 2030 and the 2034 World Cup. In Saudi Arabia, importantly, 80% of investment is deployed within the country. We've been there for decades and have a 50-50 joint venture company, so we see stability. In the UAE and Qatar, there's continued development work and infrastructure demand. As a result of the conflict, demand for cyber, electronic warfare, counter-unmanned systems and air-based defense has increased. Post conflict, there will be opportunities in critical infrastructure protection and rebuild. Our long history and trusted partner status position us well to support the region's recovery.

Operator, Operator

Our next question comes from the line of Jonathan Siegmann from Stifel.

Jonathan Siegmann, Analyst, Stifel

Matt and Carey, on the Cyber Hunt Kit contract win — interesting work and new for Parsons. You mentioned it's going to start ramping up in the second half. Can you level-set how steep that ramp could be and any differences in margins or capital intensity of that type of work?

Carey Smith, Chair, President and CEO

Yes. We're excited about the Joint Cyber Hunt Kit award. It started as an other transaction agreement. Over 100 companies submitted white papers; they downselected to three companies to build prototypes, and we were selected as the successful winner. We've already started low-rate initial production and will be moving into production in the fall. We've produced over 500 of these kits and expect another 500 to 750 as we go forward on the new contract. Another unique aspect of our solution is the first use of generative AI in a threat-hunt kit solution, and we think that was a strong discriminator in winning the award. It's margin accretive and expected to be double-digit margins.

Matt Ofilos, CFO

To add, it's a $500 million ceiling over a relatively short window, and we booked the first $250 million within the quarter. We've started long-lead material purchases on the production orders to get ahead of schedule. For second half versus first half, we're seeing about $50 million of incremental revenue benefit from that contract in the second half, which helps our second-half outlook. From a margin perspective, it's favorable and accretive this year; we'll see more benefit in out years as we scale production and delivery.

Jonathan Siegmann, Analyst, Stifel

Fantastic. And maybe one more for you, Matt. You mentioned remaining performance obligations or revenues for Federal Solutions were down sequentially. Is that just phasing, or is there anything else to keep in mind?

Matt Ofilos, CFO

It's phasing. Nothing else behind that.

Operator, Operator

Our next question comes from the line of Tobey Sommer from Truist Securities.

Tobey Sommer, Analyst, Truist Securities

I wanted to double click on the Middle East again. With some customers experiencing less oil and petrochemical revenue currently, how do you look at the risk that eventual rebuilding or reprioritization could push out or elongate projects and pressure revenue growth?

Carey Smith, Chair, President and CEO

First, Tobey, among the major sovereign funds — Abu Dhabi, Qatar and Saudi — they have amassed significant wealth. The Public Investment Fund and the Abu Dhabi Investment Fund rank among the largest sovereign funds globally. They have infrastructure and export routes that are not entirely dependent on the Strait of Hormuz. The focus in the region is strongly on diversification away from oil through Vision 2030 and similar initiatives in the UAE and Qatar. To do that, they prioritize infrastructure investments to be on the world stage for events. What we're seeing is rephasing and prioritization toward projects that deliver economic and social benefit, and that's where Parsons plays. They continue to prioritize giga projects, and we don't see large-scale cancellations. We see minor rephasing, but programs remain commitments for the foreseeable future.

Tobey Sommer, Analyst, Truist Securities

Appreciate that. And then with respect to the Cyber Hunt Kits and products, how do you envision products becoming a more meaningful part of the company, and how does that dovetail with your M&A strategy?

Carey Smith, Chair, President and CEO

We have multiple product offerings in the portfolio. Examples include assured position, navigation and timing solutions — useful when GPS is denied — and TRx, an emulator product used in Ukraine and applicable in other regions. In space, we have ground system products used for satellite control and timing; we've delivered over 170 ground system solutions. On infrastructure, we have an intelligent transportation system that is globally deployed and expanding into the Middle East. Products fall into hardware and software categories. For hardware products, such as BlueFly for search and rescue, the secret sauce is the digital signal processing and software. Many companies we've acquired, including those connected to the Cyber Hunt Kits, have product capabilities. Expect continued product-focused acquisitions because product offerings help differentiation, support higher win rates and are margin accretive.

Operator, Operator

Our next question comes from the line of Mariana Perez Mora from Bank of America.

Mariana Perez Mora, Analyst, Bank of America

The market is mostly concerned about the $1.5 trillion ask and how much could actually be done in an election year. How do you think about growth if we see a full-year continuing resolution? How much of your portfolio is funded or procured already, and how are you positioned for that scenario?

Carey Smith, Chair, President and CEO

In an election year, a full-year continuing resolution is possible and we know how to operate under CRs; we've navigated that environment for decades. The key is securing large task-order awards and IDIQs and OTAs that provide work beyond the annual appropriations cycle. We have several such arrangements and those are not constrained by a continuing resolution. Also, 50% of our portfolio is in Critical Infrastructure and not directly tied to federal budget timing. We have a record backlog with 71% funded and $11 billion of awards yet to be booked. We are positioned with diversified revenue streams and contractual vehicles that help mitigate CR risk.

Mariana Perez Mora, Analyst, Bank of America

A month ago, the Department of State put out an RFI for the next iteration of the Diplomatic Platform Support Services contract. You benefited from a confidential contract in that area. How are you positioned for that recompete given the activity in the Middle East right now?

Carey Smith, Chair, President and CEO

The DPS (Diplomatic Platform Support) contract is coming up for reprocurement. We were a top awardee on the prior contract and plan to bid and position to win the new iteration. Today, the majority of our Department of State work is with Diplomatic Security — electronic security systems, biometrics and counter-unmanned systems deployed across many embassies and consulates. We are planning to bid on the new DPS recompete and believe our operational experience and security capabilities position us competitively.

Operator, Operator

Our next question comes from the line of Louie DePalma from William Blair.

Louie DePalma, Analyst, William Blair

On the space front, last year you announced a strategic partnership with Globalstar. Do you anticipate any potential positive impacts from the proposed Amazon acquisition of Globalstar? Could you become one of Amazon's main satellite partners for defense applications across LEO broadband or LEO cellular constellations? Also related to the Globalstar partnership, is there potential your technology could be embedded into drones and other unmanned platforms to provide resiliency in various theaters right now?

Carey Smith, Chair, President and CEO

We're excited about the proposed acquisition of Globalstar by Amazon and have started to engage informally with Amazon. It's early; I won't get ahead of discussions, but there could be potential opportunities to collaborate on defense applications. Regarding embedding our technology into drones and unmanned platforms, yes — many of our space communications and resiliency technologies can be integrated into unmanned systems to provide connectivity and resiliency in contested environments.

Louie DePalma, Analyst, William Blair

Are you reiterating the prior full-year outlook for 8.5% growth in the Middle East? Has there been any change to your long-term view? How important is the price of oil to the long-term picture?

Carey Smith, Chair, President and CEO

Yes, we are reiterating our 8.5% organic growth outlook for the Middle East this year. Long-term, we're very optimistic. We've been positioned there for decades and purposely strengthened our Riyadh presence ahead of large programs. We're involved in transportation, urban development, water and environment, and we've expanded into defense and security and data centers and AI projects. Saudi Arabia's economy is increasingly non-oil — about 49% of GDP is now non-oil — so the countries are diversifying. We believe our positioning across the priorities of the Public Investment Fund aligns us well for long-term growth.

Louie DePalma, Analyst, William Blair

So even if priorities shift, you expect to maintain share because Parsons can be versatile in shifting from transportation or entertainment projects to data center projects? What shifts might you take?

Carey Smith, Chair, President and CEO

Yes. The Public Investment Fund reiterated six priorities where they're focused: tourism and entertainment, urban development, advanced manufacturing, industrial logistics, clean energy and NEOM. We are active in all six areas. We're performing airports, entertainment city, urban development, data centers and AI projects. We expect to maintain and grow share as money flows into the prioritized sectors.

Operator, Operator

Our next question comes from the line of Noah Poponak from Goldman Sachs.

Noah Poponak, Analyst, Goldman Sachs

Matt, is it possible to quantify what's in the full-year revenue guidance — what are you assuming for organic revenue growth in Federal Solutions excluding the confidential contract and organic revenue growth at Critical Infrastructure? And how do you expect those to split first half versus second half?

Matt Ofilos, CFO

Yes. Federal, excluding the confidential contract, organic revenue growth is about 6.6%, and Critical Infrastructure is about 6.1% on an organic basis. For first half versus second half cadence, Federal is roughly 4% in the first half and about 9% in the second half, and Infrastructure is about 3% in the first half and 9% in the second half — reflecting the ramp we discussed.

Noah Poponak, Analyst, Goldman Sachs

Helpful. On the CI margin, there's been a lot of progress in the last 18 months. The guidance implies a slowdown through the rest of the year. Can you talk about that? Is that mix or conservatism?

Matt Ofilos, CFO

You're right — CI margin has improved materially over the past 18 months and we're very pleased. The midpoint for the year is a bit more conservative than Q1 performance. There are some legacy contract closeouts and some natural mix shifts as new programs ramp that impact pass-throughs and materials. Q1 was a bit stronger with lighter pass-throughs. There's natural headwind over the next three quarters as we ramp newer programs. But overall the business performance is strong and we see continued expansion opportunities over time.

Noah Poponak, Analyst, Goldman Sachs

Carey, you mentioned munitions and missile support work a few times. Remind us what Parsons does there and how big that is. Also, what do you do on critical minerals?

Carey Smith, Chair, President and CEO

On munitions, we have projects at Holston and Radford and have been awarded multiple projects to modernize facilities. These facilities are decades old and require modernization — for example, new incineration systems with improved environmental performance. We've built a strong position in these programs with limited competition. We also have a unique commercial collaboration to stand up an energetic facility. Under reconciliation and future budgets, there's a focus on munitions and ammunition modernization, and we are well positioned. On critical minerals, we act as a delivery partner to private clients and federal agencies across mining, industrial and infrastructure projects. Our history dates back to the Faro and Giant mine reclamation projects in northern Canada, two of the most complex environmental programs in North America. At Giant mine, for example, we're managing roaster complex construction, stabilizing underground workings and containing a large arsenic trioxide inventory. At Faro Mine, we handle contaminated water treatment, dam safety management and landform reconstruction. These are multibillion-dollar programs and the expertise is applicable to critical minerals onshoring activities — program and construction management, contaminated waste management, indigenous community engagement and environmental remediation.

Matt Ofilos, CFO

High level, each of these munitions projects contributes roughly $40 million to $50 million per year of revenue. Radford is a little smaller this year as it scales in delivery, but it's a strong and growing market and we're excited to participate given government focus.

Operator, Operator

And our final question for today comes from the line as a follow-up from Jonathan Siegmann from Stifel.

Jonathan Siegmann, Analyst, Stifel

Back on products: the IronClad controller that you guys offer — can you sketch out the opportunity for that product? Is that used on some of the drones deployed in conflicts or partnered with some drone dominance programs?

Carey Smith, Chair, President and CEO

The name IronClad controller is not ringing a bell for me right now. I'll follow up with you after the call and provide detail.

Operator, Operator

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to David Spille for any further remarks.

David Spille, Vice President, Investor Relations

Thank you all for joining us this morning. If you have any additional questions, please feel free to contact me directly. We look forward to connecting with many of you over the coming weeks. And with that, end of today's call. Have a great day.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.