Parsons Corporation (PSN) Earnings Call Transcript & Summary

Right, I think we might be live. All right. Great. Good afternoon, everybody. My name is Gavin Parsons. I'm the Government IT and Services Analyst at Goldman. And I'm happy to have Parsons with us today, COO, soon to be CEO Carey Smith; and CFO, George Ball. Thank you guys for joining us.

Thank you.

Thanks, Gavin.

Carey, maybe if you don't mind giving a quick overview of Parsons. I think at this point, many people are probably familiar with you, but a quick overview would be great.

Okay. Sure, Gavin. Thanks. So first, Parsons has a 77-year history of transformation as a company, and I'm going to highlight on the last 4 years where we've significantly changed the portfolio. About 4 years ago, we were primarily focused on services and projects. And through a series of acquisitions as well as internal organic investment, we've transformed the company into a solutions integrator. Today, we lead with advanced technology and creative engineering. This strategy over the last 4 years has resulted in simultaneous top line and bottom line growth for both of our business segments, Federal Solutions as well as Critical Infrastructure. So today, Parsons serves the defense, intelligence and infrastructure market, and we report out in 2 segments: Federal Solutions and Critical Infrastructure. The federal solutions market includes, but is not limited to, cyber, intelligence, missile defense, C5ISR, biosurveillance, physical and border security, weapons of mass destruction remediation and environmental remediation. And our critical infrastructure segment market includes smart mobility, rail and transit, aviation, roads and highways, bridges, dams, tunnels, water and wastewater, environmental remediation as well as industrial. I'll just highlight a few of our financial performance metrics. At the end of 2020, we finished the year with $4 billion in revenue and $343 million in adjusted EBITDA. Our margin increased to 8.7%. Our margin has expanded, in fact, by 180 basis points over the last 2 years. We also generated strong free cash flow of $255 million last year, and we have a continued goal of converting 100% of adjusted net income to free cash flow. At the end of Q1 2021, our margin expansion continued, and we were up 170 basis points year-over-year. Both our revenue and our cash flow were in line with our expectations. We did experience some Q1 revenue headwinds due to COVID as well as pass-through revenue and contract transitions. These headwinds as well as for COVID will be largely complete by 2022, and we expect our growth to accelerate then and beyond as we present at our recent Investor Day and in our 3-year guidance. From a capital deployment perspective, we have a very strong balance sheet with 0.7x leverage at the end of Q1 2021 and a backlog of approximately 2 years of revenue. This robust balance sheet will continue us to make acquisitions, and we're still looking to make at least 1 to 2 acquisitions per year. We have a diversified, a balanced and a differentiated portfolio, and we're quite excited that we're aligned with the Biden administration, both from an FY '22 federal budget perspective, interim national security strategy as well as the upcoming infrastructure bill. In the Federal segment, areas such as cyber space, missile defense, C5ISR and biosurveillance will continue to be funded. And looking ahead at the infrastructure bill, there's bipartisan support around the areas where Parsons plays, including roads, bridges, highways, cybersecurity; resiliency for all of those: airports, ports and waterways, water and wastewater, emerging contaminants and overall resilience. So I think our portfolio provides synergies and areas, including critical infrastructure protection and resiliency, and we're quite excited about our guidance and the path forward. So with that, Gavin, over to you.

Great. Thanks. Maybe just carrying on with the infrastructure bill discussion since that's where there's a lot of investor focus right now. From when that's signed, how long would you expect that to take before you started to see kind of bookings occur and that to translate to revenue?

Sure. So the surface reauthorization act will expire at the end of September. So we anticipate that a bill will be signed prior to that time. The House plans to take their plan forward in May, in fact, on May 24. So we're looking forward to something by the end of third quarter. From there, it would take about 6 to 9 months before we anticipate actually seeing funds get allocated to contracts.

You had a pretty strong book-to-bill in Critical Infrastructure in the first quarter. Is there any anticipation of that bill from existing departments or agencies that might be increasing noncontract work? Or do you expect any anticipatory bookings even before the new funding comes through?

Well, we're very excited about the bookings that we've had in Critical Infrastructure. Fourth quarter last year, we had 1.3x; and then this year, we have 1.4x. These are 2 of our highest quarters that we've experienced in book-to-bill in Critical Infrastructure in recent years. However, it actually does not include anything in anticipation of the infrastructure bill. So anything that we get in the infrastructure bill would be upside beyond that.

Got it. And then of the $2 billion of total revenue in Critical Infrastructure, some of that's Middle East, Canada, some others. How much of that $2 billion do you think is directly exposed to the categories impacted by the infrastructure bill?

So overall, within Parsons, our $4 billion of revenue, $2 billion is relative to infrastructure and ties into the Biden priorities. If you look at what we have in the United States, it's about $1.2 billion that ties into the U.S. priorities. We're really excited about the categories, and again, the bipartisan support because both the Republicans and the Biden administration are supporting the hard traditional infrastructure areas, which is where Parsons plays. Areas right now that Republicans are not supporting is what's called soft infrastructure, and that is not where we play. In fact, on -- if you look at the line item for roads and highways and streets modernization, the Republicans actually have $229 billion in and the Biden administration had $115 billion in, so the Republicans were actually higher in that area than the Biden administration. Also, I would like to hit upon, that's kind of the U.S. marketplace, so $1.2 billion. But I'd like to highlight what we have outside of the U.S. Our North America presence overall is about 82% of the company. Within there, we have about 6.5% that's in Canada. The Canada market is also experiencing growth. In fact, in the Québec province alone, there was $8.5 billion infrastructure put forth in March and then an additional $2.4 million in May. So that's becoming a very robust marketplace for us. And then finally, about 17% of our business is in the Middle East. The Middle East as well has been investing in infrastructure, in particular, the Kingdom of Saudi Arabia, which is where most of our presence is. They're building new residential areas, new industrial cities, new entertainment centers, and this is all under the Saudi Vision 2030. So we expect to see growth. And one thing in the Middle East that we're excited about is their projects tend to be much larger than what you would typically see in North America. A great example of that is that we're the program manager for the Riyadh Metro. This is the largest metro in the world.

Got it. A lot of big numbers, but -- and obviously, a lot of moving pieces still. But what's your sense for the magnitude by which the categories are exposed to increase? I mean, is it double? Is it more than that, less than that? Any rough neighborhood.

Yes. I would hate to give an estimate right now because the funding is still uncertain and there's such variability, as I indicated, just in roads and highways alone. But it's definitely going to be much more than what we've seen in recent years. It's been quite a while before we've experienced an infrastructure bill. And even on the Republican numbers, we do feel that this will be one of the strongest that we've seen.

Got it. Does some of that growth translate to the Federal Solutions business in FAA or some other categories? Or is that mostly Critical Infrastructure?

Some of it will indeed transition to Federal Solutions because we do program management, we have construction management. We also do environmental remediation, and we're involved in emerging contaminants as well. And one other point I would make on the infrastructure bill is that because of recent consolidations that we've had in the critical infrastructure industry, there are very few companies of our size, scale and breadth that can manage some of the large projects that will come out of the infrastructure bill.

Got it. That's helpful. And maybe just setting aside the infrastructure bill for a minute, which is not in your 2023 guidance, what are some of the biggest drivers of growth there? I know Edmonton Light Rail is pretty significant. If you could help us size that and if there are any other kind of key programs that we should watch.

Yes. So Edmonton Light Rail, we were awarded late last year in the fourth quarter. We are looking at becoming the managing partner for that venture. That is a USD 1.2 billion opportunity, and it will span basically over the next 8 years. So as the managing director, we will be consolidating sales on that project. We anticipate for that to happen starting in the second quarter. The other areas that we've been focused in infrastructure, I talked about emerging contaminants. So it's basically, how do you eliminate the PFOS, PFAS that's in our current water and wastewater systems. That, again, is an area that's supported by both the Republicans as well as the Biden administration. It falls under the water and wastewater treatment category. Another area is environmental remediation. So we do quite a bit of mine reclamation work in Canada. We're responsible for both the Giant and the Faro Mines. And those have continuation going forward as well as there are starting to be some U.S. mine reclamation work. And then finally, I would highlight some of the digital infrastructure. There's a big thrust towards how do we make our cities smart, our roads and highways smart. And as you go forward into this infrastructure bill, there will be more sensor technology that's put in. So that we're now designing our infrastructure for a lifespan of 100 years versus the traditional 30- to 35-year life span. It will also enable us for predictability. So you can tell if there's a problem perhaps on a bridge or any of the infrastructure that could cause potential safety issues. Then finally, the area of resilience is important. We were excited yesterday that Pete Buttigieg announced that all the Critical Infrastructure projects that are going to be approved under the infrastructure bill have to have a resiliency component. So they need to be cybersecurity protected. And this is obviously a result of the recent hack on the oil pipeline, but also the water incident that occurred in Florida. It's becoming increasingly important to have resilient cyber critical infrastructure.

That's a great point. Does that allow you to leverage or can you leverage your Federal Solutions business and cyber solutions that you use for defense customers within these civil agency infrastructure projects?

Certainly, Gavin. That's one thing that is unique about the Parsons' portfolio because of the fact we have both. We have the infrastructure domain knowledge, and we have the cybersecurity defensive capabilities from our Federal business. As we look at this marketplace, there's basically 17 Critical Infrastructure segments under the Department of Homeland Security. And for Parsons, where we want to play are areas that we have installed base, areas that are highly regulated and areas that are high threat-driven because that's where we can most be differentiated. So when we look at that, we're looking at sectors such as transportation, the utility sector, the healthcare sector and facilities, how do we protect those? To be able, for example, to protect an airport, you have to understand how an airport operates. And we have that capability and the customer connections on the Critical Infrastructure side, and we have the systems and technology and cyber resiliency we can bring to bear from the Federal side.

Maybe help me understand a little better exactly how that would look in terms of an RFP or a proposal. I mean take the Colonial Pipeline, for instance, would they outsource much of their cyber? Whereas if you were to do an infrastructure projects, and obviously, you probably wouldn't be maintaining or operating a pipeline. But would you be able to bid jointly on both of those projects with the cyber capability?

That's correct. So if you have an infrastructure project, let's take the Colonial Pipeline, for example. So you might be -- have the pipeline build -- design-build project. Instead of just having a design-build project as you have in the past, you're now going to have to add a resiliency component to protect it. Obviously, most infrastructure companies don't do the resiliency component. At Parsons, we would bid both. We'd be able to do the design-build plus be able to provide the resiliency. We could also offer our cyber capabilities independent of doing the design-build and just provide the cyber component.

Got it. That's really interesting. Clearly, a really important topic right now as well. Maybe just pivoting to Critical Infrastructure margins. Over the last few years, as you laid out, you've expanded a couple of hundred basis points, but your 2023 guidance implies relatively flat from here. I mean have you pulled all the levers that you can there? Do you have to invest more in SG&A and bid and proposal costs to support this revenue growth that's coming? What do the margins look like there?

Yes. So from a margin perspective in Critical Infrastructure, we're very pleased with the margins. Very pleased with our program execution that we've had there. A few things that can help the margins going forward. First would be M&A. In the past, we've mostly been focused on Federal acquisitions, but we're now opening our aperture to Critical Infrastructure M&A acquisitions, particularly ones that have that digital technology component, which really ties in with our company's core values of moving up the value chain. That -- all of our acquisitions, as you're aware, have been accretive to our EBITDA. And so we would anticipate the same thing on the Critical Infrastructure side. And as I mentioned, as we go forward to this infrastructure bill, due to the consolidation, there's only a very few handful of players that can bid on these large projects. So we project the margins to be higher due to the limited competition in the future.

Got it. And that's not considered in your '23 guidance. So that would...

That's correct. It is not in our guidance.

Maybe just carrying through on what you just said on M&A, opening aperture to more Critical Infrastructure targets, and I think the last maybe 3 or 4 or even 6 have been in Federal Solutions as we think about it. What kind of size are you thinking about? What exactly are you looking to fill in Critical Infrastructure? Is it complementary? Is it bolt-on? Is it new markets? How do you think about that?

Yes. So in general, I'll talk about our strategy. We look for companies optimally that are around $100 million to $500 million in value. We also like companies that are growing at a top line rate of 10% and have greater than 10% EBITDA margin. We look for a technology component, whether that's on the Federal side or on the Critical Infrastructure side, that helps us move up that value chain. And our driver is really how do we get end-to-end solutions that we can bid and prime larger jobs with our customers. So you can expect us to take a similar strategy on the Critical Infrastructure side as we have on the Federal. I would highlight that even though we've made acquisitions on the Federal side, we've been really pleased with the applicability we've had on the Critical Infrastructure side. A great example is we acquired Polaris Alpha. Polaris Alpha brought artificial intelligence, cloud-based computing capabilities. So we were able to take the technologies that came in through there and apply them to our advanced traffic management system, which is called the Intelligent NETwork. It's the most globally deployed traffic management system in the world. And we were able to apply artificial intelligence, cloud-based computing and make that a total web-based system. So I am pleased with how we brought acquisitions in on one segment of the company, but really been able to get that leverage across the whole business.

Got it. What does the pipeline look like in Critical Infrastructure M&A? Is -- are there a lot of potential targets there? I know you are always in discussions with Federal Solutions businesses you work with.

Yes. I would say the Critical Infrastructure pipeline is equally as robust as the Federal Solutions pipeline. And particularly the space that we're looking at, which is how do you take a digital transformation type of company and capability and bring it into an organization like ours. It truly is a space that we feel you can get to more of a 1 plus 1 is greater than 2 type of model because we've got those domains covered, and companies such as that can really be additive to where we're headed in the future.

Got it. Makes sense. And if I look at your 2023 targets for cash generation and leverage, if you don't do any M&A by 2023, roughly what would be your kind of pro forma net leverage? And what does that imply for total dry powder over the next couple of years?

Well, we said we wanted to involve George. So I'm going to let George handle that.

Fantastic.

Yes, great question, Gavin. Our free cash flow generation is, say, nominally $250 million a year. So we would have a lot of dry powder. So if you kind of projected ahead 2 years, we would have well over $1 billion of capacity.

Got it. And what leverage level does that imply? I mean are you comfortable at 2, 3x? Is there a transaction that you'd be comfortable going above that 4 if it's large, but fits the category Carey described.

Yes. As we've said since the IPO, we'd be comfortable in the range of 2 to 2.5. For the right transaction, we'd go as high as 3. So we have the capacity to, I think, accommodate any transaction that comes along, including something that could potentially be transformative and larger than we've ever done before.

Got it. Is there more opportunity to do something transformative in Critical Infrastructure now that you've kind of tilted that way a little bit for M&A? Or is that a comment on both categories?

I think there are some large opportunities in Critical Infrastructure. Within Federal, what you mostly see now if you're trying to get kind of in that strike zone is a lot of the PE firm buildups. That's where we've tended to go. Critical Infrastructure, there are still quite a few stand-alone companies.

Got it. Makes sense. The comment on transformational, is that -- has that evolved a little bit? Over the last couple of years, I think you tended to speak more about your 1 to 2 bolt-ons a year. Is that an evolution of that commentary? Or is that kind of the same strategy you've had?

Yes. So we're still looking to do 1 to 2 acquisitions per year. And again, I think our transformation has really been driven by both our organic investment as well as our inorganic. Our organic has improved 20x over the last 4 years. We're really focused on investing in areas that we can differentiate, areas like cyber securely, but if you break that down even further, things like high-speed data processing. How do you leverage that cyber electromagnetic convergence to drive into information warfare operations? Very specific, differentiated areas that will help us against the near-peer threat going forward.

Got it. Maybe that's a perfect transition to talk about Federal Solutions, and I definitely want to talk about some of those technology-oriented acquisitions you've done recently. But maybe just starting high level on Federal Solutions. Given you just gave your 2023 targets, I think that was slightly before the Biden administration's fiscal '22 requests. Obviously, still somewhat light on details, but anything there that looks different from what you were assuming?

No, I'd say the '22 requests, and more importantly, the international security strategy, both align with Parsons' objectives. The focus is going to continue to be on cyber. In fact, it's gotten even more important in recent weeks than it was at the time that, that was published. The focus will be on near-peer threats. And on the near-peer threats, how do we do more in the INDOPACOM region? So I would highlight there our recent $618 million win that we had for C5ISR, exercises, operation, information support. That was specifically structured to be able to put together a contract that supports the combatant commanders in the INDOPACOM region. So we've built quite a bit of alignment with the Biden plan right now for FY '22 and the interim national security strategy. I would also point out some of the trade space that's going to have to be made as the administration looks at the budget, not for just for '22 but for beyond '22 is the legacy platform. So a lot of the decisions will come down to, do I need this many surface ships? How many surface ships do I need versus submarines versus unmanned? Likewise, on the aircraft front, do I need a fifth-gen tactical fighter or a fourth-gen or a sixth-gen? Where the trade space will not be made, I believe, is in the area of software and networks, which is where we play. A great example there would be Parsons is providing the Enterprise Ground Services for space. You used to have a situation where you were designing a unique ground system that controls a single satellite up in space. We've come up with a common command and control architecture that controls multiple satellites through one system. I think these are areas that the new administration is going to look at because you're getting more capability basically with less hardware and more functionality that can meet next-generation missions.

Got it. And I think it's really helpful that you guys break out your kind of subsegments of Federal Solutions such that it's in visible categories, and we can kind of see those growth drivers. And you've called out the end market growth rates in each of those in your -- through your '23 targets. Are you assuming any share gain in those categories? Or are you just simply assuming for a base case modeling or guiding that you grow in line with those end market categories and then the share gain could be on top of that?

So our expectation is that we will grow faster than the market in our high-growth areas, specifically cyber and intelligence, space and geospatial solutions and missile defense and C5ISR. In fact, our book-to-bill in those 3 market areas has been 1.45x in 2019 and 2020. So we still expect those areas because of the alignment to the administration's priorities to grow faster than market.

Got it. And they certainly have been growing pretty quickly, but the more recent book-to-bill has been a little softer. And you've talked about the '20/'21 transition year. But I mean you have this huge pipeline of pending awards worth more than $100 million. I think you've said you'll double the bids that you're submitting this year. But the book-to-bill despite that has been a little below peers and a little soft just on an absolute basis. Is that just timing? And what gives you confidence that, that does pick up going forward with a somewhat more flattish budget environment?

Sure. So our Federal Solutions book-to-bill has been about 1.1 on a trailing 12 month and 0.9, to your point on, in the first quarter. Immediately after the first quarter, we received one -- basically, a dollars in wins. So that was just after the end of the first quarter. I would also highlight the way we book is a little bit different. So a great example, I mentioned the CEOIS win for $618 million that we received. We only booked the first year on that contract even though it is a single-award contract. So we are a little bit conservative in our bookings. That said, we did have a little bit of an impact due to the intelligence community that fit into the first quarter. If you look back at 2019, we had about $2 billion of bids with the intelligence community. In 2020, we only had about $173 million. So obviously, the tail on that is impacting us the first part of this year. This year, we're bidding to $2 billion again in intelligence community bids. And basically, there were some agencies that did not have a lot of RFPs in the last year.

Makes sense. So some COVID disruption, some timing. But the money is still there, the desire to invest in those areas ...

Correct. And DoD proceeded forward. Clearly, the words that we got after -- right just after the first quarter were in the DoD space.

Okay. And then you mentioned 1.1x trailing. I think the slides for the 2023 guidance say the growth rate assumes a 1.2x book-to-bill. When do you need to reach that 1.2 to support those 2023 targets? And then do you kind of, do you need to average 1.2 over the next couple of years? Does it need to be front-end weighted? Any thoughts on that would be great.

Yes. So I would say, starting next year, we anticipate hitting that. For sure, going out. We're still going to face a little bit of COVID impact this year on a few things. But I think going forward into next year, we'd expect a stronger book-to-bill coming out of Federal. And again, our focus, when you look at the 4 federal markets, is going to be on the 3 high-growth markets. Those are the ones that have had the 1.45x book-to-bill. Those -- that's where we are going to be investing the money. And also, we have put in, when you look at our guidance, a lower win rate than we have traditionally experienced. So we have confidence in achieving those numbers.

Great. And then just on the revenue transition this year, if I -- even if I strip out, at least what you've quantified as the COVID impact. I appreciate some of the timing around agency awards and then transition of administration officials maybe isn't very easily quantifiable. But are there some other headwinds that you're facing this year? Because it seems like growth might be down even if I exclude the COVID impact in 2021 in this transition period.

Yes. So for 2021, just looking at Federal, the COVID impact is about $90 million. Our total COVID impact is about $100 million. We're going to start to see recovery on those programs as we go throughout the year. Our FAA program, we're already at 90% staffing, and we plan to be fully staffed by the 1st of June. Our program in Kwajalein will come back in the fourth quarter of this year. The one that won't come back this year will be the Antarctica program, which will come back in the fall of next year due to the time required to get back on to the ice. The only other impact I would say is that we had a large contract with Salt Waste Processing Facility, which was a design-build, test, commission and operate program and basically to eliminate nuclear waste in -- down at Savannah River. That program successfully achieved testing and commissioning. We've since transitioned into operations, but that has a lower revenue as you transition from those program phases.

Got it. That's helpful. And then maybe moving to margins for Federal Solutions, you guys have previously talked about a 10% target there. Is that still achievable organically? Or is M&A going to be the real needle mover like it would be at Critical Infrastructure like you talked about previously?

Yes. We presented at the Investor Day, we can get very close organically. We won't quite get to the 10%, but that was without M&A. If you look at our recent M&A, it's all been accretive from a margin perspective. In fact Braxton was 18.4% EBITDA margin in Q1 and Braxton acquisition alone will add 20 basis points this year. So we'll continue to, through M&A over the next few years, drive our margin expansion.

Got it. I believe you're much more cost-plus weighted than peers in the Federal Solutions business. Is that something you can evolve over time? Or is that probably pretty sticky based on just the nature of work that you do?

Yes. So today, we're about 46% at the Parsons' level of cost reimbursable. It will evolve over time. But obviously, based on our $4 billion portfolio, that will take time to evolve.

In Federal Solutions then, there's no meaningful change in your pipeline versus your current mix?

No. And again, M&A, though, has made a significant difference. So I would point out the recent acquisitions we've made. OGSystems was 84% fixed price T&M. QRC was 100%. Braxton had a significant component as well. So I think you can look at a lot of our M&A to drive that mix going forward.

And then just thinking about R&D and bid and proposal costs. Obviously, a number of your end market categories look like they'll grow faster than the budget. But in a more broadly flattish top line budget environment, does that mean you spend a little less on bid proposal and R&D? Does that mean you need to spend more because it's more competitive because there's less work to go around? How do you think about that?

So overall from R&D and bid proposal, a lot of that's reimbursed for us through the cost reimbursable work that we do. We will continue to invest in differentiated technologies. I highlighted that we've increased our investment in R&D 20x over the past 4 years. The other area we get quite a bit of benefit is other transaction agreements. Last year, in 2020, we were over $200 million in OTAs from $100 million in 2019. If you look at another transaction agreement, it's basically like another form of research and development except it's government funded, but you're producing something to get to our rapid prototyping state. And we've been one of the industry leaders in achieving OTAs. The other thing I would highlight that we're happy about is taking those OTAs and really being able to turn them into critical programs and optimally drive program of records from them. So we're happy with that area of R&D that we've been using.

Got it. And how do you think about R&D and as it translates to IP, to retainable IP that you can leverage across, whether it be hardware solutions or a little more product-oriented software like transactional sales rather than services?

So that's been a focus of ours. A lot of our R&D efforts have been on how do we develop intellectual property. A great example is our high-speed processor system that we produce for the intelligence community that we have IP. And we've actually taken that product now and we've been able to sell it on a commercial basis as well. So that's definitely a priority of our R&D investment funds. We also look at as a service, to your point. We have several as a service offerings right now. We're looking at some platform as service offerings, software as a service offerings. And we've been talking with the new administration acquisition officials on the Biden team as they come in to open the aperture within our DoD and our intelligence community space to different buying patterns.

When you say "sell it on a commercial basis", you mean as a commercial model to the government?

Yes. So basically, FAR Part 15 would be selling a government sale. If you saw under a FAR Part 12, you have to show that you have a commercial basket -- commercial marketplace. And if you have that, you're able to sell on a commercial basis.

Interesting. Do you think that you could -- and I assume that's higher margin because you're spending more of your own R&D, which obviously has more inherent risk, but -- and you presumably also retain the IP. Is that a model that the government is increasingly open to rather than government-funded R&D and then capping the margin because they're -- they paid for the development cost?

I'd say it's an area that's evolving. I wouldn't say that we've seen a complete switch there yet.

I can imagine it's relatively slow moving. Maybe just another high-level question along those lines. Is the government outsourcing more work or in-sourcing more work?

So that's a double-edged sword. And depending on where you sit, some people will say it's beneficial. Others will say it's not beneficial. At this point in time, it's too early in this administration to see if there's going to be a change. I would say, in the recent past, more has been outsourced. Whether or not there may be a trend back to more in-sourcing remains to be seen. From a Parsons' perspective, though, that's really why we've moved to a solutions integrator. And we used to be more of just services where we sold labor, but we are now providing solutions, and that's really what's different. That's tougher to in-source than just pure services.

Got it. That makes sense. And I assume there's more value-add in that, that can't do it internally, so is more inclined to outsource externally.

That's correct. And really ask the operator to provide a solution and the solution always has a technology component as well.

Got it. Makes sense. Then maybe could you give us an update on your thoughts on kind of -- you've talked about reducing office space or footprint based on more flexibility of remote work, both internally. And then any thoughts on kind of how the U.S. government has maybe embraced potentially a longer-term remote accessibility and work situation?

Yes. So from a Parsons' perspective, we are targeting about a 30% reduction over the next 3 years in our footprint. We've been -- made it very optional for employees. If employees can work from home and they can do so productively and their customer permits it, and that's what they prefer, we are permitting that. If they prefer a hybrid model where they come in sometimes and work from home sometimes, and again, the customer approves that, we're permitting that. Some people though do have to continue to work on government sites, particularly those that are in SCIFs. I think the government is taking some actions that are being considered, such as how do you get co-use of SCIFs. Today, SCIFs are dedicated to particular customers and particular missions. So how do you get more co-use? The other area is how do you develop code unclassified up to the point that it has to become classified is something else the government's looking at. And then within Parsons, we developed a couple of years ago before COVID, it ended up being a lifesaver during COVID, a DevSecOps environment. So it basically is a secure software environment that allows our folks to develop code from anywhere virtually. And this is actually a one that's compliant with the upcoming CMMC standards. So I was glad that we were kind of ahead of the curve when COVID hit, and we're well prepared to coming out of COVID to continue that DevSecOps model and have those developers develop virtually.

It seems like the government actually moved surprisingly quickly in enabling, and obviously, out of necessity, to enable remote work. But I mean is that where you think it needs to be from a cybersecurity protected standpoint? Is that IT infrastructure something that needs significant more investment from a cyber capability standpoint?

I think what's going to be important is to look at the entire supply chain. I mean that's really what the security capabilities maturity model will get to is making sure not just your tier 1 companies or your mid-tier companies that have put those security features in place, but how do you ensure that up and down the entire supply chain to your small businesses? Any breakage at any point in that chain can cause a problem. Now just yesterday, there was the cybersecurity executive order that was released and one of the key elements that came out in that is how do you get that supply chain software security. So it's clear there's going to be more attention put on that in the future.

Got it. Makes sense. How about the DetectWise solution? Obviously, going back to work, but I'm increasingly seeing more kind of kiosks, whether they be restaurants or arenas or venues. Have you had any traction there? Or is that a category kind of that we may not see at every entrance in a couple of years?

Yes. So we are...

Crystal ball for that one.

Yes. We're still selling DetectWise. We've sold it to many different industries. We've got it in at healthcare. We have it at nursing homes. We've sold it to airports. We've sold it to sports leagues. Mostly pilot systems, we're seeing a lot of demos. But it's out there in a lot of industries. We sold it to the City of Irving, Texas. They've deployed it across the entire city. We have a couple of large orders that we're waiting to be awarded. It's not yet material to the Parsons' bottom line, but I would say it's done a couple of things. One is we use it in our own facilities. So employees come in, so we know that they're okay before they come in and visit the facility. And the people that have deployed it, big names like Cushman & Wakefield and others, are working on some pilots right now. They've been very pleased that it's enabled them to get their folks back into the office and feel that they can do so in a safe and healthy manner.

Makes sense. And I assume that's in a commercial model, maybe with accretive margins to the broader portfolio?

That's correct.

Coming up on time. George, maybe you just want to cover free cash flow briefly. You had your conversion targets. But what are some of the kind of the lumpy, moving onetime pieces as we bridge from this year to 2023, just in terms of kind of the remaining comp payments, the CARES payroll taxes and any other kind of working capital lumpiness?

So the remaining comp payment is behind us now. We made the last tranche in March. So that was in Q1 just past. We do have the restoration of the CARES Act payroll tax deferral, which will be about $17 million this year and $17 million next. But not a lot in the way of headwinds. In the way of tailwinds, relative to some of the things that Carey talked about relative to running off low-margin work. We'll have recovery of retention payments on a lot of those programs. So the headwinds and the tailwinds kind of offset, I would say.

Do Critical Infrastructure and Federal Solutions have a meaningfully different working capital profile, such that if CI mix is up over the next few years with an infrastructure bill, we should expect either DSOs or inventory to change?

It's a good question. It's actually largely the same, other than the piece of our business that's in the Middle East that generally tends to have a higher DSO and working capital carry. But if you look at our working capital requirements in Critical Infrastructure in North America, the profile is actually very similar to the Federal Solutions business.

Okay. Do you have a target DSO in mind where you think you can kind of level off?

Yes. We think ultimately, we can settle in the range of 60 to 65.

60 to 65. Got it. Okay. I think we're out of time. Thank you guys so much for joining. Really appreciate it.

Thank you, Gavin.

Thank you, Gavin. Always a pleasure.