管理層發言
Good day, and thank you for standing by. Welcome to the Parsons Corporation Second Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Dave Spille, Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, and thank you for joining us today to discuss our second 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 second 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, including the risk factors described in our Form 10-K for fiscal year ended December 31, 2025, and other SEC filings. Please also refer to our earnings press release and presentation slides for additional forward-looking statement disclosures. 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 the earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. In addition, for the second quarter of 2026, management is presenting certain financial measures on a normalized basis to exclude the effect of certain portfolio shaping actions and a joint venture charge. Normalized financial measures are also non-GAAP financial measures, and the earnings press release and presentation slides include reconciliations to the customary GAAP or non-GAAP presentation as applicable. And now I will turn the call over to Carey.
Thank you, Dave. Good morning. Welcome to Parsons' Second Quarter 2026 Earnings Call. During the second quarter, Parsons demonstrated the robust demand for our integrated solutions, discipline of our strategy and the profitability and resilience in our core business amid a dynamic macro environment for both the U.S. federal government and the Middle East region. Both segments continue to post strong book-to-bill ratios and win strategic awards with Federal Solutions bookings up 51% year-over-year. On a normalized basis, our core business delivered profitable organic growth in line with our expectations and strong adjusted EBITDA, particularly in Critical Infrastructure. The Middle East business maintained excellent performance with book-to-bill exceeding 1.0x and 10% organic revenue growth, illustrating our strong alignment to regional spending priorities throughout the ongoing conflict. While we experienced strong demand for our high-value offerings, we also took decisive actions related to projects that do not align with our strict profitability and risk criteria. Since our 2019 IPO, we've been focused on acquiring businesses that expand our capabilities and customer base while exiting those that do not support growth. These disciplined decisions strengthen our company for the long term. This quarter, adjusted EBITDA was impacted by $118 million of nonrecurring events, including a $77 million charge on a remote contract and $41 million related to an extraordinary weather event and schedule delays. In our Federal Solutions segment, we took portfolio shaping actions to focus on profitable, sustainable growth. This resulted in a $19 million gain from selling two advisory contracts and a $77 million loss on two nonstrategic remote contracts that are held for sale. The advisory contracts in our Federal Solutions segment, known as SETA, Systems Engineering and Technical Assistance contracts, provide independent advice to the government. This work created a potential organizational conflict of interest with our growing development work for an intelligence community customer. By divesting these contracts, we've enhanced our ability to focus on delivering critical national security space ground solutions at substantially higher margins. This is a clear case of exiting good work to win better work and our continued high-value solutions evolution. We made the deliberate decision to exit two Federal Solutions programs in a remote location that no longer fit our risk profile. These programs face staffing and supply chain challenges and increased costs, and continuing to perform them would have required extensive subcontracting and disproportionate management attention. With a signed letter of intent in place and the customer indicating a willingness to support novation subject to the customary approval process, we believe this action meaningfully reduces our exposure with the financial impact appropriately reflected in our current results. We expect to close in Q3 2026. This lets us focus our resources on higher growth, more profitable areas of the business. We continually review the performance of all our programs with a focus on execution, opportunities, risks and financial results. These two contracts are not indicative of our consistently strong operational performance and high-value solutions portfolio in Federal Solutions. In addition to these portfolio actions, we recorded a $41 million charge in Critical Infrastructure on a joint venture project following an extraordinary weather event that disrupted productivity and schedule performance. In June, the region experienced historic rainfall at the highest level in over a century. These very unusual conditions and program delays reduced productivity and increased the cost to complete the project. Our team acted swiftly and responsibly by adding labor, equipment and subcontractor resources to keep the program on schedule and meet our customer commitments. We have updated our estimate to complete, and that revised view is reflected in this quarter's results, and the program is expected to be 90% complete at year-end. Importantly, Parsons is a non-managing partner in this joint venture. And since 2019, we have not pursued similar consortium projects. Matt and I will present today's financial results on a normalized basis without the portfolio actions and charge, to provide a clear view of our core business performance. The reconciled financials are included in the PowerPoint presentation. In the second quarter, in line with expectations, total revenue rose 8% and organic revenue increased 3%, excluding the confidential contract. Federal Solutions grew by 11% and Critical Infrastructure by 5%. We delivered an adjusted EBITDA margin of 10.1%, powered by an 11.9% margin in Critical Infrastructure. This continued improvement in Critical Infrastructure margins underscores the strength of the backlog and new business as we deliver growth with favorable business mix. The 70 basis point margin increase builds on last year's 40 basis points. Bookings were outstanding across both segments this quarter with contract awards up 24% year-over-year, resulting in an overall book-to-bill ratio of 1.2x. Federal Solutions bookings increased by a robust 51% year-over-year, delivering a 1.3x book-to-bill ratio. Critical Infrastructure achieved 1.1x, representing the 23rd consecutive quarter at or above 1.0x, demonstrating sustained demand and the Middle East remains strong with a 1.1x book-to-bill. Bookings in the first half of 2026 were very strong with Federal Solutions up 45% and book-to-bill ratios of 1.3x for both Parsons and Federal Solutions and 1.2x for Critical Infrastructure. This provides a solid foundation for accelerating growth in the second half of this year and demonstrates the strength and differentiation of our portfolio. The work we're winning is strategically important in well-funded areas. This quarter, Parsons won five contracts exceeding $100 million, including two for new work. For the first six months of 2026, we've won nine contracts over $100 million compared to seven in the first half of 2025 and five in the first half of 2024. Our technology leadership is a decisive competitive advantage in securing large-scale programs. Four of our five $100 million wins this quarter incorporated artificial intelligence, a key differentiator for Parsons. In the last three quarters, we secured 13 contracts over $100 million with 10 involving advanced AI. With over 20 years in operational AI, we apply it to areas including autonomous cyber, counter unmanned aircraft systems, electronic warfare and smart mobility, supporting revenue growth and margin expansion. Our marquee wins this quarter underscore our strategic positioning and technology leadership. We received a two-year $514 million option under the Missile Defense Agency's Technical Engineering Advisory and Management Support Systems Engineering contract, continuing our four-decade partnership with MDA. The contract covers advanced engineering for the integrated missile defense system, including work on Golden Dome, which contributes to additional growth. We booked $195 million during the second quarter. We secured $400 million in contract awards through two other transaction agreements, each with a three-year period of performance. These new OTAs reflect demand for our mission-critical defense and intelligence solutions and confidence in our ability to rapidly deliver. We booked $125 million on these contracts during the quarter. We were awarded a five-year $245 million single award IDIQ contract from the United States Naval Research Laboratory with both recompete and new work. Under this contract, Parsons will enhance mission-critical software and cybersecurity for space and ground systems, and we booked $71 million on this contract during the second quarter. We were awarded a seven-year single award IDIQ contract with a ceiling value of $184 million to support the Department of Navy's Intelligence Carry-on program. This contract represents new work and supports rapid delivery of innovative capabilities to enhance speed and agility for the war fighter. We booked $26 million on this contract during the second quarter. We were awarded a $161 million contract to continue serving as the main construction manager for the Canadian Giant Mine Remediation Program. We booked the full amount of this contract during the second quarter. In the first quarter, we booked $250 million on the Joint Cyber Hunt Kit. This quarter, Cyber Command expressed their intent to increase the Joint Cyber Hunt Kit or JCHK contract ceiling to $750 million. This is a testament to our ability to deliver advanced deployable solutions at scale. Our effective M&A strategy has enabled us to win larger and more profitable programs across both segments, and I'd like to highlight a few recent examples. JCHK brought together Parsons cyber operations experience with Sealing Tech's advanced edge computing capabilities, including agentic AI. Sealing Tech also played a role in securing the $184 million Navy Intelligence win this quarter. Similarly, the $400 million in OTA wins were led by Chesapeake Technologies. Black Signal enhanced Parsons classified capabilities, making us an approved contractor with greater access to highly classified projects and secure networks. The biometrics capabilities from Xator enabled the $392 million classified win we announced in the fourth quarter. We're capitalizing on Altamira synergies in signals intelligence, space and missile defense and foreign military equipment analysis. Recent critical infrastructure acquisitions strengthened our transportation and water market position and expanded our customer presence. As a preferred acquirer, we continue to buy differentiated companies to produce new integrated solutions for our customers. Alongside securing new strategic contracts, our acquisitions and internal investments have established a robust portfolio of mission-focused products. Today, products account for 10% of our federal business and with their rapid growth, they're expected to bolster our bottom line results. We offer both hardware and software products directly to customers or as components with their broader company solutions. Parsons national security products and solutions provide operational advantage in cyber operations, electronic warfare and tested environments and include the Joint Cyber Hunt Kit and TReX threat emulation tools. We protect critical infrastructure, public venues and transportation using advanced security and identity management. DroneArmor counters unmanned aircraft systems. AresNXT and Javelin deliver biometric identity management and the tactical awareness kit improves situational awareness for major recent sporting events. Our OrbitXchange and GOCaaS space products enable resilient satellite operations. The iNET Advanced Traffic Management platform helps global transportation agencies enhance mobility, safety and efficiency. Throughout our product portfolio, we leverage artificial intelligence to automate operations, optimize efficiency and create personalized user experiences for faster and better solutions. This quarter, we earned top three global rankings from Engineering News-Record for program management, professional services and program construction management for-fee, and we won two American Council of Engineering Companies Engineering Excellence Awards. The Canadian Institute of Steel Construction awarded us for infrastructure, and we were named the VETS Indexes 5-star Employer for our support of Veterans. Looking forward, we are very confident in Parsons' future with a strong and synergistic position in Federal Solutions and Critical Infrastructure segments. Within Federal Solutions, we are closely aligned with the administration's priorities and equipped to deliver the speed, agility and advanced solutions the Department of Defense requires. We're encouraged by the ongoing bipartisan momentum to increase U.S. defense spending. For fiscal year 2027, the administration has proposed a $1.15 trillion base defense budget, representing more than 28% increase over 2026. Importantly, the proposed FY '27 budget is closely aligned with Parsons' core strengths in missile defense, cyber, space, counter unmanned aircraft systems, electronic warfare, facilities modernization and joint all-domain command and control. Our purpose-built portfolio has differentiated capabilities to help safeguard our nation and stay ahead of evolving threats. Strong demand continues in our Critical Infrastructure segment across North America and the Middle East. In North America, our emphasis on hard infrastructure such as roads and highways, bridges, airports, rail and transit and intelligent transportation systems matches bipartisan priorities and aligns with the proposed Surface Transportation Reauthorization Bill. Notably, as of May 2026, only 44% of the Infrastructure Investment and Jobs Act funds have been spent. The Build America 250 Act proposes $580 billion of stable funding with the largest bridge investment to date. Both bills increased formula funding to 90% and permitting reforms help states advance major infrastructure projects and ensure sustained demand. Our Middle East business performed well in the second quarter, exceeding expectations despite geopolitical issues and affirming our brand strength and leadership. EMEA saw 10% organic revenue growth, a 1.1x book-to-bill ratio and strong profitability. Opportunities remain robust due to ongoing investments in transportation, urban development and infrastructure for major events, all areas that align well with our core strengths. We expect increased investments in counter UAS, cyber defense, integrated air and missile defense, desalination and critical infrastructure protection of water, energy, transportation pipeline and data centers. Reconstruction in Syria, Gaza and Ukraine may offer additional long-term potential. The Middle East continues to be an attractive growth market with strong demand and a promising pipeline. Entering the second half of the year, we expect growth driven by our backlog of $9.3 billion, of which 71% is funded, excellent book-to-bill ratios in both segments, strong win rates and $11 billion of contract awards not yet booked. We are adjusting our fiscal year '26 guidance for the portfolio actions and timing-related items, which Matt will discuss. This quarter, Parsons secured major contracts and made strategic moves that strengthen our competitiveness and long-term growth and profitability. Our diverse portfolio spans six end markets with growth rates ranging from mid-single digits to greater than 10%. With strong leadership, a talented 21,000-person workforce and an innovation-driven approach, we are well positioned for sustainable growth and shareholder value. With that backdrop, Matt will provide more details on our second quarter financial results. Matt?
Thank you, Carey, and good morning, everyone. The second quarter was highlighted by a strong underlying core business as we continue to focus on derisking and stabilizing the portfolio to drive long-term growth and shareholder value. With book-to-bill ratios of greater than 1x in both segments for the second straight quarter, revenue of $1.6 billion, in line with expectations, normalized adjusted EBITDA margin of greater than 10% for the second straight quarter and $9.3 billion of total backlog, we are well positioned to capitalize on favorable market conditions with tailwinds in both segments. Before turning to our results, I will provide clarifying details on the items we have excluded from our adjusted core operating performance to ensure full transparency. The portfolio shaping actions Carey described further strengthen our market position by expanding development work with a strategic intelligence community customer. Additionally, we will enhance our margin profile by exiting a business that no longer meets our risk and margin criteria. Related to portfolio shaping during the quarter, we recorded a $19 million gain from the divestiture of two SETA contracts and a $77 million loss on programs that are currently treated as held for sale as we have a signed letter of intent with the intended buyer. We do not anticipate material residual obligations beyond the customary transition period. Both actions are accretive to our go-forward organic growth and margin profile. Additionally, we recorded a $41 million charge related to a joint venture on a project that was affected by historic rainfalls in Q2. This charge reflects a full reestimate of the cost to complete the project, including the additional labor, equipment and subcontractor resources we deployed to keep the program on schedule. We believe this charge appropriately captures the impact and the program is expected to be 90% complete by the end of 2026. As a reminder, we have not pursued this type of consortium business since 2019. My discussion today will highlight our results on a normalized basis since we believe this approach offers a clearer picture of how our business is performing. You can find a complete reconciliation for both revenue and profitability in our PowerPoint presentation, which is available on our Investor Relations website. Turning to the details of our second quarter results. Consistent with our expectations, total revenue grew 8% and 3% on an organic basis, excluding our confidential contract. These increases were driven by growth in our transportation and urban development markets. Highlights included strong growth on key contracts, including FAA, Air Base Air Defense, King Salman International Airport and CAIA. Total revenue, including the confidential contract, grew 1% from the prior year period and was down 4% on an organic basis. SG&A expenses for the second quarter increased 3% from the prior year period, primarily driven by acquisitions. Strategic investments in both SG&A and CapEx remain focused on long-term growth and sustainable competitive differentiators. Normalized second quarter adjusted EBITDA of $161 million increased 8% from the prior year period, and adjusted EBITDA margin expanded 70 basis points to 10.1%. These increases were driven by improved infrastructure margins and contributions from accretive acquisitions, building on the 40 basis points of expansion we delivered in the second quarter of 2025. I'll turn now to our operating segments, starting with Critical Infrastructure, where second quarter revenue grew by 5% year-over-year, led by organic growth of 4% and inorganic revenue contributions from our Applied Sciences acquisition. Organic growth was primarily driven by strong performance in the Middle East, where revenue grew 10% on an organic basis. Critical Infrastructure adjusted EBITDA of $97 million increased 18% from the second quarter of 2025, and adjusted EBITDA margin expanded 140 basis points to 11.9%. These increases were driven by accretive growth in the Middle East as well as improved mix in North America on higher Parsons labor contributions. Moving to our Federal segment, where second quarter revenue increased 11% and 2% on an organic basis, excluding the confidential contract. These increases were driven by growth in our space and missile defense market and transportation markets and contributions from our acquisitions of Altamira and CTI. Total Federal Solutions revenue, including the confidential contract, decreased 3% from the prior year period and 12% on an organic basis. Federal Solutions adjusted EBITDA of $64 million on a normalized basis declined 5% compared to the second quarter of 2025, with an adjusted EBITDA margin of 8.2%. The decrease was primarily driven by lower volume on the confidential contract and unfavorable mix as a result of higher materials and subcontractor efforts diluting margins. Looking ahead to the second half of 2026, federal margins are expected to expand to 9.4%, supported by increased product sales, revenue growth from accretive contracts and contributions from acquisitions. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q2 was 76 days. The increase in DSO from the prior year period was primarily driven by lower volume on the confidential contract and timing of collections in the Middle East. During the second quarter of 2026, our operating cash flow was impacted by a strategic supply chain investment. We proactively ordered memory and storage inventory for high-margin, high-demand products aligned with national security priorities to maintain critical schedule dates while delivering accretive margins. This working capital investment, together with the timing of customer payments, temporarily impacted our cash flow for this quarter. We expect this investment to generate revenue and cash in the coming quarters and benefit the second half results. Capital expenditures totaled $16 million in the second quarter of 2026. Looking ahead, we expect CapEx to increase in the second half as we deliver investments in classified facilities and achieve critical milestones related to enterprise systems upgrades to support Parsons long-term growth and enhance efficiency across the business. CapEx remains well controlled and is anticipated to be approximately 1.5% of total revenue for 2026. Trailing 12-month free cash conversion was 74%. For the full year, we are reaffirming our conversion target of greater than 100%, reflecting our disciplined focus on collections. During the second quarter, we repurchased approximately 295,000 shares for a total of $15 million. Our capital allocation priorities remain unchanged, and our Board recently increased our buyback authority. We'll continue to invest organically to further differentiate our capabilities, pursue accretive acquisitions that enhance our win rates and ability to capture large pursuits and remain opportunistic with share repurchases. Turning next to bookings. In the second quarter, we secured $1.9 billion in contract awards, a 24% increase year-over-year, driving a strong enterprise book-to-bill ratio of 1.2x. Through the first half of the year, the book-to-bill ratio was 1.3x, supporting a favorable outlook as programs receive funding and are scheduled to ramp. On a trailing 12-month basis, our book-to-bill ratio stood at 1.1x. Both segments had solid bookings for the quarter. Our Critical Infrastructure segment continues its impressive streak with its 23rd consecutive quarter at or above 1.0x, with a book-to-bill ratio of 1.1x, including strong performance in the Middle East, where we also achieved a 1.1x ratio. In Federal Solutions, contract awards increased 51% year-over-year, resulting in a book-to-bill ratio of 1.3x. Our backlog at the end of the second quarter totaled $9.3 billion. Funded backlog of $6.6 billion increased 6% year-over-year. At the end of Q2, our funded backlog represented 71% of total backlog. Now let's turn to our outlook for the remainder of the year. We are updating our 2026 guidance based on first half results and our expectations for the balance of the year. This change is driven by the previously described divestitures, joint venture charge and timing. For fiscal year 2026, we now expect revenue in the range of $6.2 billion to $6.5 billion, adjusted EBITDA between $500 million and $560 million and operating cash flow ranges from $430 million to $490 million. We are lowering the midpoint of revenue guidance by $300 million. To provide context related to the items impacting guidance, let me walk through the adjustments in three parts. First, $85 million was related to the planned divestitures, which will benefit long-term growth and margins. Second, the anticipated infrastructure ramp has been reduced by $125 million due to lower pass-through costs in North America and timing of new awards. While the lower pass-through has a negative effect on revenue, it benefits the Critical Infrastructure margins, which continue to deliver above 10% given strong labor growth at mid- to high single digits. Third, the remaining $90 million is impacted by federal contract timing to include a protest on a large new contract award and realized delays of funding on recent contract wins. Demand remains robust with strong book-to-bill ratios, win rates near 60% and improving margins. Our focus is on delivering solid financial results in the latter half of 2026 and building momentum going into 2027. Adjusted EBITDA and cash flow guidance have also been updated accordingly. Adjusted EBITDA has been lowered to reflect the $118 million in charges, approximately $14 million on lower revenue volume, partially offset by $18 million of favorable margin trends, cost controls and program performance across the portfolio. In total, adjusted EBITDA has been lowered by $115 million at the midpoint. Note that the $19 million gain related to the Federal Charge and Divestiture benefits GAAP net income but not adjusted EBITDA. Operating cash flow has been lowered by $40 million at the midpoint due to the impact of divestitures and revenue timing. Our updated guidance ranges and key assumptions, including quarterly cadence and a breakdown of the revision are detailed in our PowerPoint presentation on Slides 16 through 18. In summary, we delivered strong normalized financials in the quarter to include adjusted EBITDA margins, new contract awards and backlog growth. We continue to deploy capital effectively by investing in organic growth initiatives and pursuing strategic acquisitions. These actions demonstrate our disciplined execution, and we remain confident in our ability to achieve our 2026 guidance and create long-term value for our shareholders. With that, I'll turn the call back over to Carey.
In closing, this quarter demonstrates the continued strength and resilience of our business. We delivered solid results across our core business, including adjusted EBITDA margins, contract awards and backlog while making deliberate decisions that strengthen our portfolio for the long term. The actions we took this quarter define our company's discipline. We reshaped our portfolio to align with our long-term strategy and redirected resources toward higher-margin, higher growth work. We resolved a conflict of interest to unlock greater opportunities, and we absorbed the impact of an extraordinary weather event. These were deliberate decisions, and we've applied the lessons learned directly and permanently. Since 2019, we have not pursued similar joint ventures, and we only accept work where we have clear control over execution. These are lasting changes to how we operate, and they make Parsons a stronger, more resilient company going forward. Parsons is a business with powerful momentum. Demand for our solutions has never been stronger as evidenced by our strong backlog, a robust book-to-bill in both segments and a growing pipeline. These provide a solid foundation for accelerated growth in the second half of 2026 and build momentum for 2027 and beyond. As I look ahead, my confidence has never been higher. We are in the right markets at the right time with the right strategy and a talented team of over 21,000 people executing with discipline every day. We've strengthened our foundation, sharpened our focus and positioned Parsons to deliver sustained, profitable growth and lasting value for our shareholders this year, in 2027 and well beyond. With that, I'll turn the call over for questions. Thank you.
分析師問答
Our first question in the queue comes from Mariana Perez Mora with Bank of America.
So my first question is on when I think about the underlying business that, as you mentioned, continues to have strong demand, but also this—what was the trigger for you to make the decision to stop the work on this SETA work or the remote contracts? Because I could imagine you have been seeing headwinds from growth and margins for a while. What changed for you to make this decision?
Yes. Thanks, Mariana. So to your point, the core business is very healthy. The divestitures that we announced are going to improve both long-term quality and margins. They don't affect future earnings potential. The normalized margin was very strong, excluding the charges at 10.2%. The bookings, the backlog, the funded opportunities we have also support future growth. And then I'd also say during the quarter, we delivered normalized profitable revenue growth that was in line with our expectations. Middle East performance continues to be strong, and our guidance change is primarily portfolio composition plus timing. So let me start with the SETA contract. We divested the SETA work because with the intelligence community and a particular customer, you have to either be a developer or a SETA contractor. And if you're in an advisory role, it can have a potential organizational conflict that will restrict our ability to pursue higher-value development work. When you look at the opportunity that we have in the development side, it's over eight to ten times the opportunity we had on the SETA side. So we needed to make a decision which side we were going to play on. Particularly with the acquisition of Altamira. This reinforces the strategic logic because of their very strong position with that intelligence community customer. So from a shareholder value standpoint, it's a favorable trade. We're giving up a modest amount of low-margin revenue in exchange for access to a development opportunity that's eight to ten times larger and has a stronger margin profile. On the second contract, these were contracts initially we thought we could execute through self-performance. But over time, the operating environment got more challenging, particularly around staffing and supply chain, and we ran into some recent challenges with the Strait of Hormuz closure. The work is in a very remote location and a difficult one to perform. So when these conditions evolved, we assessed the risk-return profile of the work and concluded it no longer met our standards for long-term value creation. We also put a new business unit leadership team in place earlier this year that's gone through and reviewed the detailed execution plan. It was clear to us that self-performing would require a disproportionate amount of management attention. We would have to continue to subcontract. And the bottom line is it was an operating model that does not align with our strategic priorities or our margin objectives. So the right decision was to pursue an exit. The party that's assuming the work already has an established presence at the location as well as resources and assets. So once again, it's the right thing for long-term shareholder value.
And then going back to the underlying businesses versus some of these businesses that are pruning out, but also the headwinds that you mentioned on the second half on the infrastructure in North America not ramping up that fast and funding on Federal Solutions also being slower than expected. How should we think about—and I know it's probably too early to talk '27 exactly—but when we think a year or two from here, how much of those headwinds should be over?
Yes. So we've been saying that we would be mid-single digits or better looking forward. And we still expect that off of what we're going to deliver in 2026. From a margin perspective, we expect to deliver 10 to 20 basis points margin expansion. That's on top of 110 basis points of margin expansion we've had over the last two years.
Our next question coming from the line of John Godyn with Citi.
Obviously, a little bit of a complicated quarter. I just wanted to kind of focus on this idea of core businesses being strong. It sounded like when you were bridging the guidance update, some of the delays in funding and timing mismatches are affecting the core business and weighing on EBITDA. So I was trying to square that circle a bit and maybe revisit that bridge and make sure we kind of all understood what was going on there.
Yes. Let me start, and then Matt will jump in. But the guidance revision is about portfolio composition and timing. It has nothing to do with demand. And a portion of the reduction reflects revenue associated with the contracts that I just discussed that we're going to divest. Those are, again, deliberate decisions to focus on the long-term quality of our portfolio, the margin profile and management focus. The remaining reduction you referenced is largely timing related. We saw a protest on a large federal contract, which we were awarded—a $190 million contract over five years. So it's uncertain how long that protest will last. There have been some funding and award timing delays on recent wins. An example I mentioned is the Intelligence Carry-On Program. We have been slow to get funding from customers as well as the other transaction agreements. And then we're taking a prudent view of infrastructure ramp-up in the second half based on timing of some new business wins, which we had mentioned in the prior quarter that we're waiting to receive award. I think what's important to note, since Q4 we've won 13 contracts over $100 million. Six of those are for entirely new work and 11 of the 13, including all six for new work, are within the Federal Solutions segment. But when you look at the federal environment, it still remains choppy because of uneven timing with delays associated with budget uncertainty. If you look at whether it's the NDAA budget approval, reconciliation bill, supplemental or a potential continuing resolution, those are unknown actions. And then we're still waiting on reconciliation funds to flow. They indicated those funds would flow very strongly between now and September. We've seen some uptick on FAA, which we're expecting to have very strong results for the year as well as our teams' contract, but we're still expecting more between now and November. There's also some procurement backlogs and workforce constraints within the federal government. So when you look at the underlying business, our bookings, our backlog and our margin all reinforce confidence, and this is really a timing story, not a demand story. The strength in the bookings is what gives us confidence for the second half of this year as well as 2027 and beyond.
Yes, John, the only thing I would add to that is, as you mentioned, the revenue impact: if you look at the adjustment to adjusted EBITDA, we're coming down about $115 million at the midpoint with the charges in the quarter of about $118 million. That means we're overcoming about $200 million worth of revenue volume. So we're offsetting that with the outperform on EBITDA. The underlying EBITDA performance is actually improving, particularly in the Critical Infrastructure area where about half of the revenue volume reduction within the quarter was related to pass-throughs of materials and ODCs, and those come at very low margins. So we've seen particularly strong margins within Critical Infrastructure. And so we've been able to overcome the impact of the revenue volume.
Okay. I appreciate that color. After a quarter where there are some large charges, I think it's natural for people to worry whether there's a pattern of charges. Obviously, the nature of some of these events is that they're unpredictable and a surprise. But maybe you guys can comment on your confidence that this is a bit of a one-and-done situation as opposed to the beginning of risk factors that may continue.
Yes. So let me start with the infrastructure program, the one that faced the weather-related issues. It was a historic once-in-a-century weather event. This is an old program where we're a non-managing partner in a joint venture consortium. This impacts equity and earnings; there's no revenue impact. In 2019, we made the decision to no longer pursue similar joint venture consortiums like this program was bid under. We strategically changed the focus to design engineering and program management. So when you look at the quality of our portfolio in Critical Infrastructure, it's the best it's ever been. And I'll reiterate, this program is nearing completion. We're in our seventh year. It will be 90% done at the end of this year. I think our strategy to revert back to program management and design subcontracting has been validated. We have five consecutive quarters of greater than 10% margins in Critical Infrastructure. Our book-to-bill has been greater than 1.0x for 23 consecutive quarters. Win rates have remained greater than 60% for the past three years, and we've delivered strong profitable organic revenue growth. So I think that answers that one. With respect to the federal one, that's an anomaly in our federal business. We have always had very strong operational performance within the federal business. That was a situation where we had aspired to expand in a geographic location without full recognition of how difficult it was going to be to manage staffing and supply chain. We are no longer bidding work in that location.
Our next question in the queue comes from Sheila Kahyaoglu with Jefferies. Over the past three years, we have delivered strong, profitable, organic revenue growth, so I think that answers that one. With respect to the federal matter, that was an anomaly in our federal business. We have always had very strong operational performance in the federal business. In that case, we had tried to expand into a geographic location without fully recognizing how difficult it would be to manage staffing and the supply chain. We are no longer bidding work in that location.
Maybe just on—I understand the CI contract issue now with the JV structure. Maybe going back to the Federal Solutions $77 million write-down. I guess what resulted in that write-down given it's one-third of your full year EBIT essentially? And at what point did you think about divesting the SETA businesses? And is there any other SETA business left in the portfolio?
Yes. So let me start with the SETA one. We are continually looking at our portfolio for divestitures and exits. We've exited base operations support a couple of years ago in our federal business. We've exited hard-bid construction in our critical infrastructure business and reverted back to program management and design subcontracting. We're no longer bidding consortium models. So I'd say in federal, SETA is an area we're always looking at. With respect to this intelligence community customer, with the Altamira acquisition we now have prime contracts there; previously we were largely a subcontractor. We looked at the addressable market for Parsons at a time when that customer needs very fast innovative solutions, and we think we're the best company to provide it. When you have an addressable market that's eight to ten times larger, and we generally are a developer contractor, it makes sense. I would say the largest remaining SETA program that we have would be the Missile Defense Agency TEAMS contract. We've done it for four decades. It's important and a critical driver for Golden Dome, both the systems engineering work as well as our facilities life cycle management and test work, and we see substantial growth. So with the Missile Defense Agency, we've made a conscious decision to stay on the contractor-advisory side in that instance, but you have to do it case-by-case with each customer. Relative to the remote contract, this quarter we reassessed where we were. We looked at the amount of management time and attention it was taking, and we thought about the customer's interests and needs as well, and there was another company already there better equipped to perform that work. With recent issues such as supply chain holdups and the Strait of Hormuz, we felt it was the right time to divest that business and exit for the long-term strength of the business and to expand our margin profiles over the long term.
Our next question in queue coming from the line of Gavin Parsons with UBS.
Two-part. First, can you help us bridge the second half revenue step-up versus the first half? And second, bookings have been pretty strong for a while, but you've had to cut revenue guide a couple of times in the last year or two. How do you think about guidance so that we can be sure that this kind of appropriately contemplates that risk?
Yes, I'll start with the bookings, and then Matt will take the bridge to second half revenue. The bookings really tell you about demand and the demand is very strong when you look at 23 consecutive quarters greater than 1.0 in Critical Infrastructure and the very strong federal bookings we've posted, up 51%. The guidance reflects the pace at which it's going to convert within a specific window. Within federal, that's been affected by the protest, because we can't predict timing on how long a protest will last, and then the uncertainty of federal timing on jobs we've already won. Some contracting offices are challenged getting federal funding flowing, particularly GSA. In Critical Infrastructure, it's strictly timing of large jobs. A couple of years ago we won multibillion-dollar jobs—Georgia State Route 400, Hawaii Rail, Transit Newark AirTrain. Those projects peak at different times. We have several in the second half of this year that we're looking forward to executing, but we're being prudent in guidance relative to timing on those large jobs.
Yes, and I would just add, Gavin, the second half growth, if you look sequentially Q2 to Q3, is about 3% sequential growth and then up about $20 million from Q3 to Q4 at the midpoint. So it's a mix of seasonality plus new business. On seasonality, timing on mine jobs up in Canada; as you come out of the winter season you have a stronger second half traditionally. On the new business side, programs like Nammo, King Salman International Airport, additional scope within CAIA, and some of the OTAs we won essentially had minimal revenue in the first half and will ramp in the second half. So it's a mix of seasonality and new business, and we have high confidence in that approximately 3% sequential step from Q2 to Q3 and a slight increase into Q4.
Our next question comes from the line of Andrew Wittmann with Baird.
I wanted to ask on cash flow. Matt, you reiterated the cash flow target for the year, but can you quantify the inventory pull-through on memory and other items you articulated? Also, I noticed contract assets are up about $158 million year-to-date while contract liabilities are about flat. What's driving that and when does that reverse? Just trying to get a better sense of cash flows so far year-to-date.
Yes. The biggest strategic investment was in production on the Joint Cyber Hunt Kit and other products; chips and memory and similar components are a major challenge. To achieve committed delivery dates as we enter production on this contract, it was prudent to invest ahead of schedule. That was roughly $30 million in Q2. So the majority of the downward pressure on cash flow in Q2 was related to that. On the net investment balances, we're seeing an uptick in the Middle East. Middle East collections have been slower in the first half due to implementation of new cash systems delaying some payments. We saw some strong cash payments at the start of Q3. All in all, we see a clear line of sight to deliver about $350 million of cash in the second half as these items normalize. On the federal side, we have some milestones and deliveries that will generate roughly $50 million of cash in the second half.
Our next question coming from the line of Jonathan Siegmann with Stifel.
Does the portfolio still have additional non-managing partner programs that we should be aware of? I understand you're not taking any new ones, but are there still additional carryover ones that we should keep in mind could be unattractive business in the long run?
Yes. There are three where we're the non-managing partner. One of those will wrap up as we go into 2027. The other two, including the weather-related contract, wrap up in early 2028 and mid-2028. These were contracts we pursued and won in the 2019–2020 timeframe. The other two are performing well and have executed very well.
I've talked previously about legacy programs. The majority of the higher-risk joint venture structures were in those legacy programs that are essentially at completion, and we're just in final negotiations on change orders and similar items. So to Carey's point, we are significantly derisked from where we were a few years back.
Our next question coming from the line of Gautam Khanna with TD Cowen.
Matt, can you articulate the $300 million reduction in sales guidance? Could you quantify the buckets? I heard various items from pass-throughs to divestitures. Could you walk through explicitly how much was pass-throughs, how much was contract divestments, etc., so I can bridge it?
Happy to. The $300 million reduction in revenue guidance: $85 million was related to the divestiture. That leaves about $215 million of reduction. In Infrastructure, about $125 million, which you can see on Slide 18 of the PowerPoint. Of that $125 million, roughly $50 million to $60 million is pass-through revenues. We saw lower pass-throughs through the first half of the year of about $25 million, and we've extended that to year-end, so call it $50 million to $60 million of lower pass-through, which carries very little EBITDA and actually benefits Critical Infrastructure margins. The remainder is timing on new business. On the federal side, the $90 million delta: about $20 million of that is related to a protest. The rest is timing of IDIQ and task orders and funding on work we've already won.
Our next question coming from the line of Matthew Akers with BNP Paribas.
I was wondering if you could talk a little bit more about what you're seeing in the Middle East right now. It sounds like demand is holding up, but just curious if you're hearing anything different from your customers as the conflict in that region goes on.
Thanks, Matt. Our first concern in the Middle East is safety and security of our 7,500 employees in the region, and they are all very safe. In fact, when I talk to them every day, it's pretty much business as usual. We haven't seen any slowdown in contract awards; our 1.1x book-to-bill reflects that. We also haven't had any force majeure or insurance claims. No program in EMEA represents more than 1.6% of revenue, and we have 20% of the Middle East in backlog. Our average contract duration runs about five years; 49% of the revenue is tied to long-term frameworks and 80% of our EMEA business is tied to long-term sustainable programs. So what we're seeing is continued focus on sectors where we participate. The public investment fund during the conflict came out with a strategic profile for 2026–2030 focused on tourism, travel and entertainment, urban development, advanced manufacturing and innovation, industrials and logistics, clean energy, water, renewables and NEOM. We participate in every one of those areas. Post-conflict discussions are starting now; priorities will include integrated air and missile defense systems, border security, counter unmanned aircraft systems and critical infrastructure protection for water, utilities and data centers. We have water and utility clients and 12 data center clients, and we're working with them on master planning and security. The rebuild opportunity is significant; we estimate a total addressable market ranging from $800 billion to $1 trillion, and our addressable market within that is about $5 billion to $10 billion per year. There's uncertainty given geopolitics and timing, but the biggest opportunities could be in Syria, which we estimate at $250 billion to $400 billion, and Ukraine at about $500 billion over 10 years.
Our next question coming from the line of Tobey Sommer with Truist.
I was wondering if you could comment on expectations for contract mix change between cost-plus/T&M and fixed price over the medium term, given customers are looking at what can be converted and the detail you provided around OTAs?
Today, we're about 55% fixed price and T&M and 45% reimbursable. We're higher on reimbursable within the federal business; Critical Infrastructure is higher on fixed price and T&M. That mix should stay relatively consistent. Critical Infrastructure has historically been about 75% fixed price/T&M and 25% cost reimbursable. Federal will stay relatively consistent as well because we're seeing growth on cost-plus contracts, particularly FAA, where we've seen strong growth, and the Missile Defense Agency TEAMS contract where we've also seen strong growth. This is offset by the increase in the products portfolio. The Joint Cyber Hunt Kit is ramping: we've completed delivery of 12 low-rate initial production units and need to deliver 62 this year, 74 in 2027 and 74 in 2028. We also expect our overall products business to increase 30% to 40% next year, and the majority of that resides within federal.
Our next question coming from the line of Sangita Jain with KeyBanc.
I'll keep it to one. Carey, I understand the breakdown of the reduction in revenue. How do you see the end of this fiscal year shaping up? Usually there's a fiscal flush; I'm guessing you're not seeing that based on the revenue cut. Also, how is your guidance sensitized for a potential government shutdown later this year?
For the end of the fiscal year, we've started to see some funds flow, particularly FAA and the Missile Defense Agency for Golden Dome work, but I wouldn't call it a huge flush yet. Some contracting offices are facing backlogs and workforce constraints that limit how quickly funds can be obligated. Regarding a government shutdown, approximately 50% of our business is not federal. Of the federal portion, we have a strong backlog of $9.3 billion, 71% funded, and $11 billion of awarded but not booked value. That gives us the ability to run for quite a while without material impact. In prior shutdowns we've seen very little impact to the company.
Our next question coming from the line of Noah Poponak with Goldman Sachs.
Can you hear me okay? At a high level, should there be some rethinking of investor communication and disclosure and balance in how you discuss the business? We had the confidential contract, then FAA, now this. I appreciate it's not easy to run the business, it's complex, and guidance is hard. But I don't remember you discussing portfolio reshaping or organizational conflict of interest recently. I'm trying to find prior discussion of OCI. The discussion of the business is usually quite bullish versus some of these potential headwinds. How are you thinking about that, if at all?
Yes. We plan to hold an investor day next year and will discuss more then. On the confidential contract, that was canceled by the administration; we could not have predicted that and were given no heads up. The FAA outcome I think is favorable: under our existing contract terms we expect over 30% year-over-year growth. Portfolio shaping is something we're always evaluating—how to move to higher-growth, higher-margin markets. We've always had SETA work, including the Missile Defense Agency for four decades, but we try to minimize SETA where possible because we prefer to be a developer. We'll use the investor day to further communications.
To add, the sale of the SETA work was a $19 million gain for us, which was a favorable outcome. The charges at the remote location that we're divesting are tied to the risk tolerance around that multiyear work. That's the balance between the two items.
And our last question will come from the line of Louie DiPalma with William Blair.
I'm interested in breaking out the one-time charges versus recurring impact from the divestitures and write-downs. Net for everything, how much was the second half EBITDA guidance reduced relative to prior assumptions embedded in guidance last quarter?
We took $118 million in charges in the quarter and reduced guidance by $115 million. So in theory, total year adjusted EBITDA on core performance is up despite about $200 million headwind on revenue. Put differently, the underlying EBITDA performance improved, particularly in Critical Infrastructure, and the guidance reduction largely reflects the one-time charges and timing.
And that's all the time we have for our Q&A session. I will now turn the call back over to Dave for any closing comments.
Thank you. Thanks for joining us this morning. If you have any additional questions, please feel free to contact me directly, and we look forward to connecting with many of you in the weeks ahead. So with that, we'll end today's call. Thank you very much.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.