Parsons Corporation (PSN) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome back to the 2022 JPMorgan Industrials Conference. I'm Seth Seifman, the U.S. aerospace defense equity analyst, and we are very grateful to have Parsons Corporation here with us this afternoon and the CEO, Carey Smith. I think we're going to start off with some slides and a presentation from Carey, and then we'll go into Q&A. So Carey, thanks so much for being here. Appreciate it. And yes, why don't you go ahead?

Thank you very much, Seth. It's great to be back in person and not on Zoom. So I appreciate it. Just to start off, under safe harbor, we may have some forward-looking statements that will be included today. So to tell you a little bit about Parsons, we have a 77-year history, but we've been through quite a bit of transformation if you look over the past 4.5 years. Specifically, we've changed from a company that was predominantly services and project focused, the one that's a solutions integrator that leads with advanced technology. And we've been able to do that both through internal organic investment as well as M&A. So if you look today, we're divided into 2 segments. Our Federal Solutions segment is focused on delivering information dominance across all domains and our Critical Infrastructure segments focused on smart, sustainable infrastructure deployment. From a 2021 perspective, we finished in revenue at $3.7 billion. You can see we're pretty much 50-50 between the 2 segments and $310 million of adjusted EBITDA margin, again pretty much 50-50 between the 2 segments and $206 million operating cash flow. We have very strong book-to-bill at 1.25x, and our backlog is just over 2 years of revenue at $8.3 billion. Plus we're pleased with our net debt leverage ratio, which is 0.8x, and that gives us quite a bit of flexibility to continue to do M&A as we move forward. Our investment thesis and key messages for today are divided into 4 parts. First, we have a strong position in growing and enduring markets. If I first look at the Federal segment, we're focused on cybersecurity, missile defense, space and C5ISR. And then in our Critical Infrastructure segment, we're focused on transportation, water, wastewater treatment and environmental remediation. It's our goal to have top positions in these markets, which are both growing as well as enduring. We have a favorable financial outlook. As we wrapped up 2021, the second half of the year, we grew 9% over the first half of the year with 7% of that being organic growth. And I mentioned very strong book-to-bill of 1.25x trailing 12 months. As we move into 2022, we've provided guidance, and our guidance shows that we're going to expand our margins by 20 basis points as well as provide a total revenue growth of 4%, 2% of that being organic and 26% cash flow improvement. Parsons is different. And if you look at why we're different, I would say it's 2 areas. One is we have the breadth and depth like a large business to be able to bid prime and win very large contracts. In fact, we won 2 contracts over $2 billion this year. But we're also a company that's divided 50-50 between the 2 portfolios, and that gives us a lot of flexibilities. Oftentimes, those markets can be countercyclical. We're actually in a very fortunate position today where both markets are growing. Finally, we're socially and environmentally responsible, not just from our perspective of what we do internally where we commit to ourselves to be able to improve diversity, both from a ratio and a gender perspective, but also when you look at our portfolio that has $2 billion of our business that's focused on ESG solutions. So the macroeconomic drivers are favorable for Parsons' portfolio. First, starting up with infrastructure. Fortunately, we do now have an omnibus bill. So the new funds under the Infrastructure Bill -- the Infrastructure and Investment Jobs Act will start to flow. The total Act was worth $1.2 trillion, $550 billion of that being new funds. Next is near peer threats. If you look at where we've been positioning our portfolio over the last 5 years, it has really been against the near peer threats. So areas such as the space race, areas such as the cyberattacks and things that are occurring. And specifically, where Parsons aligns, if you look at space, we're focused on vehicle launch integration. We're focused on space ground systems, space situational awareness. And then from a cyber perspective, we do both offensive and defensive cyber, and we do platforms, operations, and tools. So these are going to be increasingly important areas, not just the recent threat from China with the hypersonic glide vehicle or the recent threat from Russia with anti-satellite attack in space but more importantly, the situation right now that's underway with Russia's attack in the Ukraine. I'll talk a little bit about each of our 4 business units, starting with Mobility Solutions. In Mobility Solutions, we're focused on smart infrastructure. So it's looking forward, how do we create infrastructure for a 100-year life span versus one that's been 30 to 35 years in the past. How do we put inside sensors that can show us predictability rather than just having infrastructure failing us not being aware of it? We also do onerous engineer programs. A couple of examples of those would be the Riyadh Metro program where we're the program manager for the biggest metro project that's going on in the world today or the LAX modernization project where we're the owner's consultant, helping them deliver that critically important project. We perform consulting and planning, program construction management as well as water and wastewater treatment. A good example of that would be in Southern Nevada who we've supported since 1993 on water projects. Our Connected Communities Group is focused on advanced traffic management systems. We have a product that's called the Intelligent NETworks. It's deployed in 7 countries around the world, 24 state department of transportation, 22 cities. And we believe it's the most globally deployed advanced traffic management system that exists. Again, there's a lot that you can do with the sensors and the data that come off of that to basically focus on a smart city. We also do bus electrification work focused on zero-emission buses by 2040. And we've performed over $250 million of work in that area. On the aviation, rail and transit area, we've done over 450 projects combined where we do a lot of program management effort. We do systems engineering and then finally, environmental remediation of mines, oil and gas wells. One of the projects I mentioned that was over a $2 billion win, we just went up in Faro Mine, Canada to perform that work. And then we do PFOS, PFAS, emerging contaminant removal. We've been involved in over 600 different purification projects focused there. Under Federal Solutions, we have 2 business units as well. The first one is defense and intelligence. We're in high-growth markets, including cybersecurity where we do offensive and defensive cyber. But in addition to supporting for current customers like Department of Defense and the intelligence community, we also have the capacity to be able to do cybersecurity for critical infrastructure. So if you think about somebody that's attacking an airport or a transportation system or a utility company, you really need a company that understands how the domain works, but also a company that's best equipped to protect that domain. We're involved in converged cyber, electronic warfare and information operations. If you look at the enemy and the near-peer threats specifically, they're fighting a war that's an information warfare. So we have to be able to fight the same, and that means that you have to converge these 3 domains. We're involved in aero missile defense. One of our largest contracts that we were awarded this year is the repeat of our TEAMS contract where we support with over 1,000 people in every aspect of what goes on in the missile defense system. And finally, we do a lot of resiliency, resiliency of weapon systems and space systems. And then in the space area, we provide situational awareness. We integrate small satellites on the primary launch vehicles, and we developed the concept of enterprise base ground systems where you don't need an individual command-and-control system for every large satellite, but rather you can use one common system. Moving to Engineered Systems. This area we're involved in environmental remediation, just like our Critical Infrastructure segment is and projects, including, again, PFOS, PFAS removal, specifically on military installations. We also design smart infrastructure for the future. If you think about a smart city, a smart base is pretty similar, you're using sensors and data. So again, you can see the synergies that we have between these 2 business segments. We do border and nuclear security and finally, physical security and surveillance. If you think about electronic surveillance systems, that again will be a large growth area and infectious disease support. We've been very active in M&A, having done about 5 acquisitions over the last couple of years. And we intend to have this as our primary method of capital deployment going forward as well. We keep a very strong candidate point. I think you can expect to see us do 1 to 2 acquisitions per year as we've done in recent years. We're focused on what are growing and profitable markets. Most of our recent acquisitions have been in the cyber and space area and they basically enabled us to have end-to-end solutions to be able to move up the systems engineering and solutions value chain to bid prime and win larger contracts greater than $100 million. We're focused on mission-critical customers and technology differentiation. When I talk about our acquisitions coming up, you'll see that we've bought in areas like data analytics, cybersecurity, cloud computing, artificial intelligence, things that are going to be really important for the future. And then finally, we want acquisitions that are growing. We want greater than 10% top line growth and greater than 10% EBITDA margin. I would say the trajectory for Parsons really started to change back in 2011. We were predominantly focused on the Critical Infrastructure segment until that point. And then we acquired SPARTA, which brought in the missile defense capability. In 2014, we did a critical infrastructure acquisition of Delcan up in Canada focused on intelligent transportation as well as rail and transit. Again, we've been very active in recent years, starting with Polaris Alpha. Polaris Alpha brought us a lot of entrepreneur innovators into the company, specifically around space situational awareness, cyber, artificial intelligence and big data analytics. Next was OGSystems, which brought geospatial intelligence and threat analytics and QRC technologies focused on radiofrequency, situational awareness. Braxton Science & Technology Group was our acquisition in 2020 focused on space ground systems as well as assured positioning, navigation and timing in case you lose GPS, so that you still have location information. And then our 2 most recent ones in July of this year were BlackHorse Solutions, which brought the convergence between cyber electronic warfare and information dominance and then a small technology acquisition called Echo Ridge, again focused on the assured position, navigation and timing as well as software-defined radios. I talked earlier about our portfolio. Again, we do about $2 billion of programs that are involved in what would be environmental and social efforts. I mentioned the Riyadh Metro. It's a great example of where we're going to be reducing carbon emissions. We're also going to be improving security and safety. Gordie Howe Bridge is another terrific example of that. We're also focused on holding ourselves accountable to delivering such results, and we've put into our incentives a diversity metric for the leadership team as we go into this year for both racial and gender diversity. Not to go through each of the industry recognitions, but I want to categorize them. We pride ourselves on being an ethical company and are very proud of the fact that for 13 consecutive years, we've been awarded the world's most -- one of the world's most ethical companies. If you look at the rest of our recognitions, I would say that you can group them in a category of diversity, and you can group them into excellence. Under a diversity category, we're focused on women, gender. We're focused on minorities. We're focused on veterans. We're focused on the LGBTQ community. If you look at excellence, we've received awards for elite innovation. We've received awards for project excellence and engineering excellence. And all around, again, I think this is just a testament that we are a different type of company that we pride ourselves on making sure that we deliver not just for our shareholders but also for our employees. So Build Back Smarter. This is what we call our campaign for infrastructure. And if you look at currently the United States, there's $1.2 trillion that is going to be -- or has been approved under the Infrastructure Investment Jobs Act. And now just with the omnibus approval, that's moving forward, $550 billion of that being new funds. What applies to Parsons is the majority of that, $284 billion in transportation, so that's going to help us in roads, highways, bridges. That's $110 billion of that amount. There's also rail and public transit. There's airports. There's EV infrastructure, which we're involved in. There's another $199 billion that's focused on safety and cleanup. Part of that is about $75 billion that's under power utilities. There's another $55 billion for water that's going to be and $21 billion for environmental remediation, including things like PFAS, PFOS. And then there's a scenario that's called new investments, which is about $67 billion, $65 billion of that being broadband. We currently do a lot of broadband work through our advanced traffic management system. So that directly applies to Parsons' portfolio. And I would say just not the Infrastructure Act, but when you look worldwide right now, we're really excited about the opportunity in build back smarter. Up in Canada, in Quebec alone, they put in $11 billion between March and May for infrastructure funding. And then the other big part of our portfolio is in the Middle East where you're seeing mega programs going forward, particularly in Saudi Arabia, programs like NEOM, which is touted to be over $500 billion, more like Qiddiya. So this is a great opportunity for Parsons, not just to Build Back Better but most importantly, build back smarter and make our solutions for the future ones that are driven off of technology. So in summary, we had a strong finish to 2021. We're really pleased with our 9% second half growth over the first half of the year. We also improved our headcount hiring by 30% between the second half and the first half of the year. We've shown that we've been able to expand margin 180 basis points from 2018 through today, and we're going to be delivering 20 basis points as we go into 2022. We got a portfolio that's aligned to the macro trends, not just in the U.S. but globally. And I would say markets, again, in both segments that are important, cyber space, missile defense, C5ISR and then transportation, water, wastewater, environmental remediation. So we're differentiated. If you look at our company, I do think we're different in the industry. I think there's no other company that can basically design and understand the domain of our critical infrastructure, but also protect it from a cybersecurity perspective and be able to apply that necessary technology to really be able to build back smarter as you go forward. So in summary, Parsons is excited to be creating the future of national security and critical infrastructure. And with that, I will turn it over to you, Seth.

We'll do some Q&A. And yes, I'll start off.

I guess maybe asking. You talked about the different places where there is exposure to the infrastructure legislation, and it sounds like it's actually a fair amount of it or places where Parsons can be. In terms of the -- if you try to draw a beat on the first couple of opportunities that might come out of that, what do you think they would be? And also, what's the time frame from sort of appropriations to when some of these projects might get under contract and get started?

Yes, great question. So the planning process and critical infrastructure goes on for quite a while. So you do get a pretty clear line of sight, which is fortunate. The way that I would look at the infrastructure finance in 3 buckets. The first bucket would be formula funds, which are basically allocated to the states dependent on headcount changes, the amount of mobility. The second bucket would be existing grants. So those grants that are already in place. And then the third bucket would be new grants. The 2 that will move forward fastest will be the formula funds and the existing grants because those are already in place. The new grants will have to be -- the programs will have to be put into place and then the application process will have to start. The Biden administration team led by Mitch Landrieu has put together about a 465-page guidebook that it kind of outlines all these various programs when they're going to proceed, how they're going to proceed. And then we work very closely with each of our customers, and they know what they're receiving generally and when. So we've kind of put together a total pictorial road map for what's going to be coming to Parsons, what we need to worry about first and be pursuing. I also highlight that the reason we're really excited about this. If you look back at the time of the last infrastructure funding, which was in around the 2004-time frame, and it was called the Safety Act, it was about $244 billion over 4 years. Now we're looking at $1.2 trillion over a period of 5 to 8 years with $550 billion of new funds. The other thing that's important about that is we have probably half the number of competitors because through M&A, the industry is consolidated. So we see this as a great opportunity for Parsons.

Yes, yes. I mean, I would imagine there's just by virtue of the number of competitors. There would be a certain amount of that that's kind of -- that they should be able to capture a good amount of business there. Okay. When you think about international critical infrastructure, what are the major opportunities there? And I guess, similarly, what's the time frame that those might come to fruition?

Yes. So from an international perspective, about 82% of our business is North America. So between the U.S. and Canada, quite a big presence in Canada. And then the majority of the rest of it is in the Middle East. We have a very small part, less than 2%, that would be in the rest of the world, and that's mostly around Europe. Those projects are moving forward outside the U.S. already. I indicate Canada already has -- each of the provinces are putting together a funding plan. Quebec alone, $11 billion that was authorized between March and May. Province of Ontario is moving forward quite rapidly, Alberta and others. So we're seeing those projects, and we're already bidding many of those as we speak. And then in Saudi Arabia, it's going to be interesting. The NEOM project, they actually just held a meeting here, I believe, in New York City this week on that program, but that's a brand-new industrial city being built from scratch. We were one of the first companies on the ground to win a program management contract there for just shy of $100 million. So we're excited about that because Parsons' history goes back to kind of laying the foundation of Dubai and Abu Dhabi. So we're very well positioned to be able to do the same thing in Saudi.

Okay. Excellent. When you think about the relative growth rates of the 2 businesses, Federal Solutions and Critical Infrastructure, how would you compare those, the outlook for the 2 of them in terms of like typical market growth rate over time?

Yes. So I probably said 3 weeks ago that I would have said Critical Infrastructure would be growing faster. But I think with the situation in Ukraine, the defense budgets now are obviously going to get more support than what they have been receiving. So in the past, Federal Solutions has been growing quicker. With the Infrastructure Bill, we do expect quite a bit of growth to happen. The last time that we had an Infrastructure Bill, Parsons grew double digits. So we're hoping for the same under this type of bill. So I think it's going to be pretty close. I would say just we're very fortunate. We're in 2 segments right now that are both seeing growth. And then if you look at our submarkets, we're in the right submarkets for growth as well.

Yes. When you talk about that double digits in the Critical Infrastructure, is that something that could potentially be sustained for a few years. So thinking about growing a couple of hundred million per year in Critical Infrastructure for a multiyear period?

Well, I think it's going to be dependent on the timing of the funds flow and how quickly the funds flow. The biggest challenge that will exist will be getting the money allocated from federal to state to local and getting that happening. And so dependent on the rate that we see those funds flow.

Right. And then in Federal Solutions, if we think about the incremental funding that might come into the defense budget, what are the areas within Federal Solutions that you think are most likely to see additional funds?

I would say cybersecurity in both offensive and defensive. And I mentioned earlier, critical infrastructure protection. It would be very unfortunate if we have an attack in an area such as telecoms or finance or transportation systems, but it's something that we have to be ready to defend against. So I think that's going to grow. Within space, I would say, space situational awareness. There's a lot going on up in space with all the launches going up in LEO. With the recent anti-satellite test there's a lot of debris floating around in space. So that would be a high growth area for us. And then the launch vehicle area as well in space, there's -- you have to have the capability to get the small satellites up there, so that we can have a proliferated environment that's more resilient than our original environment of large satellites and were involved in the launch vehicle business. And also in space, I would say, space ground systems coming up with this enterprise system that can command and control different satellite systems and without requiring an individual ground system for each. And finally, I would add to that, in addition to cybersecurity, I would say, physical security, physical surveillance, there's going to be much more of a need for that, and again, particularly with the situation in Ukraine.

Okay. In cyber, it's interesting to me because it's something that I think we all in reading what's going on think of as a super high priority in some place where budget should be growing. It hasn't always seemed that way in terms of looking at different companies. I think a lot of us thought maybe after the solar winds attack that we'd see more of a pickup in cyber revenues at government services companies. I guess what gives you confidence that this time will be different? And what do you think is the disconnect maybe between the urgency that we all feel should be around that mission versus sometimes what it looks like we see in the dollars?

Yes. So I would say where we've been involved lately has been Department of Defense and Intelligence Community, cybersecurity. And those budgets have grown over recent years, maybe to your point, not to the extent that we would have hoped or thought they would have. That's going to continue to be of need. But on the Critical Infrastructure and unfortunately, we'll probably take an attack, which is most unfortunate. A lot of the infrastructure is owned by private industry and not by the government. So it's really important that there's a strong collaboration between the government and the intelligence community, particularly that knows what's going on and information sharing with the private sector. The organization responsible for that is CSIA that's under Department of Homeland Security. And I think we've seen a lot of recent improvement in that area. That's going to have to continue to happen, again, particularly with the Ukraine situation. I think everybody is on highest alert.

Yes. And the ways you talked about the exposure to the proliferation of LEO constellations. It sounds like an important opportunity. I guess do you -- in terms of the situational awareness, what services does Parsons provide? Typically, who are the customers? Because when you are thinking about the number of space stacks that have emerged or destacks that have emerged over the past several months and thinking about the number of constellations that we might see, not to mention SpaceX, et cetera. So I guess what's the Parsons role there?

Yes. Our role is to provide data for various users. We have over 150 different users. And the users range all the way from the intelligence community to commercial users. They get various different applications depending on where they are in that food chain.

And on the launch side?

We actually select the payloads that are -- so first, our contract is with Space Systems Command. And our role is to select the payloads that will be launched and to perform the integration of the payloads on the launch vehicle itself. It's done through what's called an ESPA adapter. And that can be anywhere from 1 small satellite payload up to 20 small satellite payloads with an individual launch.

Okay. And is that -- and so these are typically Defense Department satellites, so basically working with ULA or SpaceX to get those payloads onto the rockets and have them be properly integrated so that they deploy.

That's correct. They would be doing the primary vehicle launch integration. We would be doing the small satellite launch vehicle integration as well as the payload selection.

Right. And so I would imagine that as you look at the Space Development Agency and what they want to do, as that number of small satellites increases over time, it should be fairly significant opportunity there.

There's definitely going to be a need, particularly if SDA goes forward on the pace that they're planning.

Yes, yes. I guess what's the competitive environment like for that?

It varies, I would say. For us right now, on our contract, it was kind of -- I think we were the only bidder at the time, but…

That's a good competitive environment.

So looking forward, it's hard to say what competitive environment will be. We think we have a differentiated advantage. We had a lot of firsts in our program. One of the first was actually separating the payload before the primary payload took off. We were one of the first to do multiple payloads at a time. So we feel that we have a differentiated competency.

Okay. Is that a capability that you would look to bring to the private sector ever?

It's something we could do for the private sector with our background, mostly in Department of Defense, that's where we're focused.

Okay. You mentioned, I guess, the -- I think there was a significant increase, maybe 30% or so increase in hiring from first half last year to second half. Maybe if you could talk about the hiring environment. We were just talking a little bit earlier about some of the demands that new workers have these days. But just in general, in a business where human capital is a critical input, what that environment has been like? How you think about managing that in a tighter labor market?

Yes. So I'd say for us, we try to run our company more like a technology company in terms of our culture and to the tune of having foosball tables and hackathons at night and pizza parties and kind of a fun place for people to come to work. I think that differentiates us. We're not kind of a [ mystagogy ] or legacy type of company from that regard. We promote agility, entrepreneurism, innovation, disruptiveness who can come up with the best different solutions to solve one of our customers' most critical problems. And a lot of that's come not just through, I'm going to say, legacy Parsons, but it's really been through how we integrate our acquisitions. So when we buy companies, we don't just take their programs and their contracts, but we actually take their leadership team. And if you look at my leadership team now, it's mostly made up of people from acquisitions. And that's been for the reason of making sure we keep that innovation, that disruptive culture. I also think going forward, from our perspective, we're going to be as flexible as possible. So we've surveyed people and we said, do you want to work remote? Do you want to work hybrid? Do you want to be in the office? It came out 1/3, 1/3, 1/3. And so we said as long as you can do it contractually and your manager allows you, we're going to be very flexible and have -- allow you to do that. But yes, we're going to have to get together still, so that we keep kind of the cultural spirit that we have. We also have some different programs internally that helps us retain employees. We have a truly built career path. So you can go up the management path. Or if you want to stay technical, you can stay technical your entire career. And that's at every level kind of -- so you would get up to a point of being the Chief Technology Officer, Technical Fellow. And so that's very attractive to a lot of people that want to stay in engineering and remain technical.

Excellent. I think one part of the current environment and inflationary environment has to do with labor, another part has to do with materials. I guess, as you think about working on infrastructure projects kind of over -- that are going to be executed over a long period of time. How does being involved in this period where input costs have become very variable and trending higher? How has that been different? And what are you doing differently as a company to deal with that?

Yes. So first, I'd say our portfolio is about 46% cost reimbursable. So that part is kind of covered. Most of ours is labor that we tend to look at. What we've done in the past is we try and get escalation clauses wherever we can, whether it is labor and material. But we're going to going forward pay much more attention to ensuring that we can do that because it is variable. We haven't yet experienced much. So if you look at last year, we were about 2.7%. And so at this point, we've been pretty good. But I'm going to say going forward, we are putting a lot of focus on that.

Right. Excellent. I guess is there something that you'd want to highlight maybe as something that you think maybe investors underappreciate about the story at Parsons that you'd emphasize now?

I'd say the biggest thing is our diversified portfolio is a big plus between the 2 segments. There's areas if you look at -- first, I'll start with skill sets, program managers. We both run program managers, so we can change that skill set back and forth between each. Engineering discipline, systems engineers, design engineers, we have a common pool that we can draw upon. Environmental remediation, we do that on both sides of the house. So when you look at a lot of the work we do, it actually is common data. And I talked about technologies, data analytics, that applies to both. Cybersecurity, we're one of the only companies that has both under the same roof that can provide resiliency for all this infrastructure that's going to be built. Artificial intelligence, that is used across both of the segments as well. So what I think is least understood is that these are 2 complementary segments and at a time where the future needs both of these segments under the same roof.

Excellent. Taking a look at the leverage, I think kind of stood out in the slides, I think down at 0.8x or so right now. What's your kind of leverage tolerance for the company? And where -- I guess where could that go? How eager are you to deploy capital this year?

So we'll continue to do 1 to 2 acquisitions this year. And we keep a very robust candidate pipeline. It's going to be our #1 mechanism for capital deployment. Our Board did authorize a share repurchase program up to $100 million. We have repurchased $22 million to date. We'll tend on the share repurchase to look at about $50 million a year, basically, the amount that offsets ESOP distribution. So on the M&A front, I would say, leverage-wise, we would be comfortable going up to about 3 to 3.5x, but at a run rate of more of a 2 to 2.5.

Right. Okay. And so that leaves a fair amount of room from here to there. And so when you look at the pipeline now, is it -- do you see opportunities that run the scale of smaller companies to larger companies? Or does the pipeline tend to be focused in on either on one side of the house in terms of Critical Infrastructure versus Solutions or in terms of the size of the target company?

Yes. So we've been focused on capabilities, and our objective is how do we move up the value chain to get to higher value business mix. And that's what's enabled us to win all the larger contracts that we've been able to win. So we'll continue to focus on capabilities. Our acquisitions have been on the Federal Solutions side, mostly because we look for advanced technology place. And as I mentioned, even though we bought a company like Polaris Alpha that brought data analytics, AI, cyber, cloud computing, we take all those competencies. We apply it to Critical Infrastructure. We would be open to something on the Critical Infrastructure side if it was a technology type of play.

Okay. And then I don't know if this has come up for you, but it is something we have seen across the sector is, there just seems to be a lot more zealous enforcement of antitrust rules under this administration. And is that something that you've had to consider on the M&A front? Is it something that's kind of come up at all in your consideration of potential acquisitions?

I don't think in our industry that we've seen it, and I don't expect it to at least for the time being. I believe there's too much competition out there today. So I don't think you'll see it in our industry. It more applies to the OEMs.

Yes. Okay. Okay. When we think about the -- I guess the profitability in the 2 businesses, and I guess the EBITDA margins are, I think, fairly similar, 7, 8, 8-plus percent range. As you move up the value chain and make acquisitions that allow that, is there a longer-term target for those margins? Is there much opportunity to expand them?

Yes. So historically, since 2018, we've expanded by 180 basis points. And this year, we've committed in our guidance at midpoint to a 20-basis point expansion. So we firmly believe that the actions we've taken in the past and will continue to do going forward are going to continue to drive that. So that includes M&A activity at an accretive basis. Derisking our portfolio as we go forward and leveraging our fixed-price T&M portion of our portfolio to drive that margin expansion.

Okay. Yes. And I guess as you look at more fixed price, what's the -- what do you do to kind of manage the risk of taking on additional fixed price work?

Yes. So our objectives stick to our core knitting, do what we know. So if you think about Critical Infrastructure, our core knitting is design. We're a renowned, world renowned design engineering firm. So stick to the core which we've done for decades, and we do very well. Onerous engineer work, we're extremely good at that, helping the customer. And then I would say on the Federal side, we have less fixed price work. But we've done well on projects like program management, construction management, an example would be the work that we're doing out at Kwajalein Airfield right now as well as some of our physical security projects.

Okay. On the ESG front, it's something that I brought up a couple of times with companies at the conference. And you spoke to it in the presentation. I'm kind of curious, what kind of conversations do you have about that with investors? Where is the investor focus on ESG at Parsons? Is it more in thinking about the infrastructure work you're doing and maybe the E portion of that? Is it more on the social and governance? And how has it been a point that you've spoken about a lot with investors?

Yes. We've spoken some about it with investors. I think from our perspective, our portfolio is not as well understood and that $2 billion of our portfolio can be directly tied to E&S type of initiatives. I would say their questions have come in all pieces. First is, internally, are you holding yourselves accountable to achieving ESG goals? Which we are. We've put that in our incentives, both from reducing emissions or greenhouse gas emissions by 20% by 2025 as well as adding a diversity goal to our short-term incentive plan. And then externally, I would say it's looking at our projects like transportation, where we again reduce emissions, improve safety, improve security, improve social equity. Looking at our water, wastewater, looking at our environmental remediation in areas like PFAS, PFOS where we're improving drinking monitor capacity.

Excellent. I think that covers most of the questions that I had to offer for today. So maybe we'll wrap up here. We're just about at time down under 30 seconds here. So Carey, I want to thank you very much for being here and for talking with us about Parsons, and we really appreciate it.

Thank you very much, Seth, and great time management.