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

Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2020 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. On the call with me today are Chuck Harrington, Chairman and CEO; George Ball, CFO; and Carey Smith, President and Chief Operating Officer. Today, Chuck will discuss execution against our corporate strategy, George will provide an overview of our third quarter financial results; and then Carey will review our operational highlights. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the Company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These risk factors are described in our Form 10-K for fiscal year ended December 31, 2019, and other SEC filings. Please refer to our earnings press release for Parsons' complete forward-looking statement disclosure. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. I now will turn the call over to Chuck.

Thank you, Dave. Good morning to everyone on the call and welcome to Parsons' third quarter 2020 earnings call on this eventful morning of continued vote counting. We had a great third quarter and this was against the backdrop of challenging global macroeconomic conditions. We delivered record adjusted EBITDA, while also delivering outstanding cash flow. These accomplishments, once again reflect the resiliency of our combined portfolio of federal solutions in critical infrastructure. After the end of the quarter, we announced the pending $300 million acquisition of Braxton Science & Technology Group. Braxton reinforces our strong position in a rapidly expanding space market. We're very excited about joining forces with Braxton. It further expands our cutting edge space capabilities, our strong government space customer base, and expands our addressable market to include critical ground-based technology systems. This acquisition exceeds all of our quantitative and qualitative M&A thresholds. Now, I'll review a few of our third quarter financial highlights. We reported adjusted EBITDA of $101 million. This is an adjusted EBITDA margin of 10% achieving on an interim basis, one of our long-term financial targets announced during our IPO last year. We also generated $145 million of operational cash flow and into the quarter with a 1.2x book-to-bill ratio driven by 1.5x in federal solutions. We continue to execute on our goals of winning larger programs and additional OTA awards. We are also simultaneously delivering strong program performance for our customers. Exemplifying these points during the quarter, we won a $300 million contract with a classified customer, doubled our year-to-date OTA awards over last year, and continue to receive high customer satisfaction scores. The above reflects our strong contract performance, which drives margin expansion. We continue our disciplined balance sheet management and execution of our M&A strategy. We recently closed a $400…

Thank you, Chuck, and good morning, everyone. Today, I'll organize my remarks into the following five key areas: the income statement, cash flow results, the balance sheet, contract awards and 2020 guidance. As Chuck indicated, we had an outstanding third quarter. Strong program execution and our continued focus on cost management resulted in record adjusted EBITDA and margin and excellent cash collections drove operating cash flow of $145 million. We also opportunistically raised $400 million of additional capital to fund our Braxton acquisition and enable investment in additional strategic growth opportunities. Regarding the details of our financial results, total revenue for the third quarter decreased by $19 million or 2% from the prior year period. This was driven by growth in our Federal Solutions segment, offset by unexpected decline in critical infrastructure revenue, consistent with our ongoing strategy to roll-off low margin pass-through work. Indirect IG&A expenses increased $30 million from the third quarter of 2019, driven by lower transaction related expenses and insurance costs. Adjusted EBITDA of $101 million represents an increase of $12 million from last year, and adjusted EBITDA margin increased 130 basis points to 10%. These increases were primarily driven by higher earnings from unconsolidated joint ventures and lower indirect G&A expenses. I'll turn now to our operating segments, starting first with Federal Solutions where third quarter revenue grew by $12 million or 2% year-over-year. This increase was driven by higher business volume on new and existing contracts. Federal Solutions adjusted EBITDA decreased $5 million or 9% from the prior year quarter, and our adjusted EBITDA margin decreased from 10.4% to 9.2%. These decreases result from a significant contract milestone incentive fee recognized in the third quarter of 2019, which was not repeated in the current year and higher pass-through revenue in the current quarter. And…

Thank you, George. As Chuck and George indicated, we had a strong quarter from an operations perspective and completed a significant acquisition that bolsters our space presence. I'm proud of our team's accomplishments, given the challenging conditions we're facing on a few of our contracts due to the COVID-19 pandemic. Despite these challenges, we delivered strong cash flow results and a 10% adjusted EBIT margin for the first time in our history. The third quarter was our strongest year-to-date for our Federal Solutions team with a 1.5x book-to-bill and we won large single award contracts, strategic space and cyber contracts and other transaction agreements. 70% of our total awards in the third quarter were for new business. We also achieved a historical milestone on our Salt Waste Processing Facility contract by moving into the operations space. And QRC Technologies reported the best quarter in its entire history. As you can imagine, I'm very excited about our Braxton acquisition, which positions us well with key space customers. Notable contract wins in the third quarter include a $307 million contract win with a classified customer. $115 million option year on our Combatant Commands Cyber Mission Support contract, where we provide offensive cyber operations, defensive cyber operations, and open-source intelligence in support of joint all the main operations. We expanded our rail systems footprint with over a $100 million in wins, including a $45 million contract by the Bay Area Rapid Transit District to support the implementation of a communications based train control system. Once complete, this will be the largest communication based train controlled installed system in North America. We're also awarded the TransLink Broadway Line of British Columbia Canada for over $44 million where Parsons will design the system elements for the fully driverless rapid transit system, as well as provide…

Thank you, Carey. In summary, our teams third quarter execution was very strong. We delivered strong financial results and exceptional program performance for our customers. We also further strengthened our balance sheet with a $400 million convertible note offering, and we quickly put this capital to work with a strategic acquisition that will drive additional growth in our space market. Before we begin the Q&A session, I'm pleased to announce that we'll be conducting our first Virtual Investor Day on March 11th of next year. This will be a great opportunity to learn more about our strategic vision, hear from market line leaders and participate in various Q&A sessions. We look forward to the event and your participation. Now, we'll open the line for questions.

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

Thank you so much. Good morning, Chuck, George and Carey. First question maybe George for you. Looking at the implied cash flow ramp in Q4, it's over 50% of the total, and I know you guys are Q4 heavy. But can you give us some of the moving -- major moving pieces around working capital and if any one-off items there?

Yes, certainly, Sheila. As you indicated, we had a nice quarter and the third quarter building on momentum with the second quarter. Traditionally the fourth quarter is a very strong quarter for us. As I indicated in my prepared remarks, Federal Solutions was a major contributor in the third quarter. We anticipate a significant strength from Critical Infrastructure in the fourth including in the Middle East.

Okay, thank you. And then, maybe another question on the business just parsing out space and geospatial and cyber and Intel. Those two businesses were up 37% and 20% in the quarter. So pretty significant numbers and definitely areas that are more insulated from broader budget trends. Are there any ways to maybe quantify the success that you're seeing in these two businesses, with the [ph] win rates, book-to-bill? Sorry if I missed it and if you said it, I’m just trying to get a sense of the runway for growth.

Thank you, Sheila, and thank you for your questions. We're very bullish on our cyber and Intel and space and geospatial markets. Yes, those were obviously both helped and appended greatly by the acquisitions of Polaris Alpha and OGSystems. And our win rates have been very strong. Also appended by the larger contracts that we're winning than we had historically one without the acquisitions that we garnered. And our win rates had been very strong. Carey mentioned a couple of the wins that we had this last quarter. And we continue to be very bullish on the strong growth of those two units and our missile defense C5ISR unit going forward. And Carey any additional color you'd like to add to that?

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

Okay. Thank you so much.

Thank you, Sheila.

Our next question comes from Gavin Parsons with Goldman Sachs. Your line is now open.

Hey, good morning.

Good morning, Gavin.

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

Well, as we've mentioned in the past, Gavin, our approach on IDIQ contracts beat a single award or multi multiple award is to book those very conservatively. So although we may have won a $1 billion contract or in the case of say CCMS, contract were north of $500 million. We're only booking it in pieces per year. Whereas I think some of our other companies in this space would book the whole item. And so that, what that gives us is that; one, we're never getting too far out in front of our headlights, but two, the confidence that our backlog will continue to build on contracts we've already won, but just haven't booked the entire backlog yet, given our booking policies. So we expect our backlog continue to grow in the next 2 years at least, but that's where we've got some pretty good visibility. Carey, anything you'd like to add on that, regarding any of the specifics?

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

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

Yes, if we look at COVID and it gets tougher to estimate, Gavin, because one, we're kind of comparing numbers to plan numbers. But you kind of spread it apart, you'd look at Federal Solutions for example. They maybe growing in the high single digits since COVID. And that's nominally $50 million of headwinds that we're facing in that market probably -- close to 75 across the portfolio. So if that's a $50 million revenue headwind this year and you haven't reduced your revenue guidance for the year, obviously, to your point that it implies much better core growth. So assuming that's a net impact and there's not some big tailwind from kind of COVID benefits that go away next year. I mean, should we think about you making up that full amount of COVID headwind on top of the core business growth continuing next year? Or is that double count in growth next year?

Yes, I think that's double counting. Here's the way I would think of it. Some of our contracts like Antarctica where they just aren't allowing us on the ice for a year. They've been very fortunate to not have any COVID cases, and they want to keep it that way, or Kwajalein Island where the Marshallese made those same decisions. Both of those decisions we don't control. So when they decide to allow us on the ice or when they allow -- decide to allow us back on the islands, think of it as we pick up where we left off and whatever that duration that we were not on ice or on Island, then that just extends the contract out in time. Same could be said quite frankly for FAA, who has also taken a very cautious role with their unions in terms of continuing the workload. So a lot of that’s just gone down to a base load and then the work that we didn't do, we'll add to the end of our contracts.

Makes sense. Thank you.

Our next question comes from Joseph DeNardi with Stifel. Your line is now open.

Thanks. Good morning. Chuck, can you just talk about kind of appetite for additional M&A. Obviously, you have the capacity to do more on the balance sheet, but just from a kind of an internal bandwidth standpoint, should we assume that you all are done for a period until you digest what you've done or are you still in the market?

Yes, I would not jump to the conclusion that we are done. We are still in the market. We've shown in the past the ability to pull off multiple acquisitions per year. We have the infrastructure built to do that. And more of what either accelerates or slows our Acquisition. Assimilation is the quality of the companies that are out in the market space. And I think as I've said in past calls at any given time, we're talking to 5 to 10 different companies, and we're primarily pulling out of our supply chain.

Got it. That's helpful. And then -- and maybe you all want to save this for the Investor Day, but could you provide some kind of qualitative commentary around expectations for 2021, even if it's directional revenue and margins?

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

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

Yes. Thank you. So there's no other -- there's no dissynergies. There was a couple of very minor OCI contracts. We're talking like nominally 5 people that have no material impact on the revenue or profit generations or the integration. So one of the great things about Braxton is there was not a lot of -- wasn't really any overlap. We were working side by side. And So now we're greater as one.

Thank you.

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

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

Yes. The activity in the space market right now is very strong, partially because space is becoming such a crowded frontier with all of the lower orbit satellites being launched. But obviously, we have a great deal of activity from private industry as well as from governments, China expanding and alike. We also, from a national defense perspective, have a lot of satellites in orbit that are being controlled by multiple systems. And the beauty of an enterprise ground system, enterprise ground services, like the work that Braxton does is allows the defense department, NASA, others, to be able to control and communicate between those multiple systems at one point. And that's an area that is going to have a lot of growth -- has shown a lot of growth already, but we'll grow even more in the years ahead. We're very excited about the space market.

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

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

Last question for me. Could you speak to the medium and long-term financial impacts of what you've learned from the pandemic work-from-home, et cetera? Because there may be some benefits in there as well as the discrete headwinds we've discussed already on the call.

Yes. Great question. One of the things we've learned is that the public wants confidence in the infrastructure they use, and whether that is just better education over the ventilation systems or improvement there too, more physical separation, better cleaning regimens. So there's going to be a lot of modifications to physical infrastructure to improve distancing and cleaning and all of those kinds of attributes. But the other thing that it's proven for our customers is that you can do a lot of things virtually in terms of controlling these networks. And you can do it safely from a cyber perspective. So whether it's virtualizing these transportation nodes and replacing servers with cloud-based operations that allow for much more efficiency and a better use of taxpayer dollars going forward. We think there's going to be a big emphasis on this SaaS models. The ability for contractors to deliver infrastructure and then charge for that on a pay as you go basis. I’m very bullish on the infrastructure industry. It's -- we think it's going to go through a lot of transformation, which will be very good for customers and for companies like ours.

Thank you very much.

Our next question comes from Ron Epstein with Bank of America. Your line is now open.

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

Yes. Thank you, Ron. You look at our organic growth and as we said, going for sands COVID, our federal solutions unit is growing in the mid to upper single digits and our Critical Infrastructure, which I'll be lumpy in the runoff of that work. Arguably we're running that as a flat unit over say 3 to 4-year period, and we're still on track to drive those to overall growth rates. COVID obviously had some impact. What's the great news there is the agility of the team to be able to pivot and to sell more products. Did they got GOTS products or COTS products, which may not be as material to the top line, but have had a very important impact on the bottom line as well as the pivot to more professional services and IT oriented services in our Critical Infrastructure business.

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

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

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

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

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

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

Got it. Right. Thank you very much.

Thank you, Ron.

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

Hey, good morning.

Good morning, Josh.

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

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

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

Yes. Well, I think it's -- you hit the nail on the head between real estate leases and some associated IT costs. We think that our populous will kind of break down a third, a third, a third, and I'm not implying that it's going to be equal thirds. Maybe a better way of saying that would be three buckets. They will be those employees. They're going to come back to work full time in our offices, and that'll be driven either by their personal choice or the choice of our customers in our teams where they need the collaboration and working day to day, side by side. A second group will choose to work-from-home on a permanent basis. They were already leaning that direction either from their childcare perspectives or aging parents or some other criteria that they're using and we can support that. We've proven that we've done it now for 7 months straight. And then thirdly, there'll be a group, and I think this will probably be the largest group of our workforce who will choose a hybrid option. And in that option, they might be working in office 3 days a week and working from home 2 days a week. All of that leads to a net reduction of real estate costs, which you can't get day one because we often have leases that probably average 3 to 4 years out in terms of termination. But we can see each year our real estate costs coming down and improving the efficiency of the use of our overhead dollars. And if I was to be a betting person, I would say, in a high-end we'd look at somewhere around 40%, 50% reduction and on a more conservative side, probably somewhere at 30%. So as I'm sitting here today, those are the kinds of percentages that I'm looking at. George and I are working on our financial planning.

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

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

Great. Thank you for the time.

Thank you.

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

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

Yes, I think that -- yes, since COVID began, we've obviously seen reduced travel, Cai. And I'm sure that's true for almost every business. Bad for the travel industry, but good for the overhead of other companies. And as you said, we've seen medical costs declined as well as fewer folks are doing elective surgeries or going into their doctor visits. And vacation is probably off a bed. Although I think we have seen, and we've tried to promote people continue to take vacations, to promote good mental wellbeing. But certainly those are the three areas we've seen positive wins from.

Right. And what sort of impact? Because your margin at Fed Solutions was down not only year-over-year, but was down sequentially.

Yes. So a lot of that Cai as you know goes to the award fees, which tend to be lumpy. We've got large award fees. We received last year off the salt waste processing facility, and this year's come off of some of the chemical weapon demilitarization work that we've done. So those episodic award fees, when they hit, have a big determination on that multiple. The good news is that the margins are increasing steadily over time with the core Federal Solutions market as we run off more of that pass-through revenue, they're out of engineered solutions predominantly. And we are garner for one more fixed price level of effort work and to greater product sales.

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

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

Thanks so much.

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

Chuck, George, Carey and Dave, good morning.

Good morning, Louie.

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

That's a great question. Let me -- I'll take the initial response and have Carey provide a little more color. But what I can say is data analytics is a very important strategic asset capability that we have. When we talk about artificial intelligence and we talk about correspondingly the high speed processors we create, the hardware kit that we create and the data analytics that we provide in converting that large stream of raw data into information with the analytics, through the high speed processors and analytics we are performing, and then ultimately converting that into actionable knowledge with our AI. algorithms. That is a key element of what we're doing across all of our market sectors. And that's pretty ubiquitous. And as you say, it is critical to these large new programs coming out. The other area before I pass it to Carey, I just wouldn't underemphasize is the work we're doing in electromagnetic warfare and specifically in the area of high end lasers. And our ZEUS laser system, which is embedded in our RADBO products that where now -- we announced where signed to the Air Force. That is another great area of R&D and application and commercialization for us. Carey, as you -- take that into little more depth?

Yes, we've been the Army's mission partner for 15 years, helping them understand data and analytics and working with them to develop off-the-shelf software that collects information from various sensor feeds and plots that data into the appropriate battle field operating systems for the operational side of the Army. As you mentioned, Parsons did develop the sensor ingestion software for the Distributed Common Ground System-Army. And our software is responsible for standardizing all the incoming sensor data, including the integrated sensor architecture messages that we format them into the DCGSA system to be able to easily process and analyze that. And that is critical in helping the Army and Department of Defense mine the data and track the insurgents. We also involved the big data platforms in other areas, including Defense of Cyber Mission Operations program, where we service the lead systems integrator for the army on the DCO. And then I would -- want to point out also on the Critical Infrastructure area, we do a lot of data analytics. If you look at our intelligent network system or you look at the work that we're doing in the tooling market with our partner Neology.

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

Yes, I'd say at this point, it would go up moderately. But as Chuck suggested in a response to an earlier question, a good part of that run-off has already occurred. So we would have some uplift. If I were to put a number on it, I would say it might be another 50 basis points.

Sounds good. Thanks, everybody.

Thank you.

Thank you, Louie.

Our next question comes from the line of Joseph DeNardi with Stifel. Your line is open.

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

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

Great. Thank you.

That's all the time we have for questions today. I'd like to turn the call back to Dave Spille for closing remarks.

Thank you very much for joining us this morning. If you have any questions, please don't hesitate to give me a call. And we look forward to speaking with many of you over the coming weeks. And with that, we will end today's call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.