Parsons Corporation (PSN) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Parsons Corporation Third Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I will now hand the conference over to your speaker host Dave Spille, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss 2026 financial results. Please note that we provided presentation slides on the Investor Relations section of our website. Joining me on today's call are Carrie Smith, Chair President and CEO and Matt Opolos, CFO; and George Ball, our former CFO and a current member of our Board of Directors. . Today, Cary will discuss our corporate strategy and operational highlights, and then Matt will provide an overview of our third quarter financial results, as well as a review of our 2026 guidance. We then will close with a question-and-answer session. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors described in our Form 10-K for fiscal year ended December and other SEC filings. Please also refer to our earnings press release and presentation slides for additional forward-looking statement disclosures. We do not undertake any obligation to update forward-looking statements. Management will also make reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. Please refer to our earnings press release and presentation slides for a reconciliation of the non-GAAP financial measures. I now will turn the call over to Carey.

Thank you, Dave, and welcome to Parson's Third Quarter 2026 Earnings Call. I'd like to begin by recognizing persons more than [ 21,000 ] employees for their dedication and professionalism. Their continued focus on our customers' missions enabled us to deliver results that exceeded our third quarter commitments. We also remain deeply focused on the safety and security of our 8,000 employees across the Middle East. Their resilience and commitment have allowed us to maintain strong execution across the region and continue delivering for our customers. This quarter, we delivered on our financial and strategic objectives through disciplined execution. Revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow all exceeded our commitments. Demand remained healthy across both Federal Solutions and Critical infrastructure despite a challenging macroeconomic backdrop. TD's results, combined with our strong bookings, a growing backlog and robust pipeline demonstrate the resilience of our portfolio and provide a solid foundation for enduring organic growth. Building on this momentum, we continue to advance our strategic portfolio initiatives and drive operational excellence. We cited a definitive purchase agreement for the divestiture of our remote location contracts and are finalizing approval of the related contract novation. This transaction further derisks our portfolio and enables us to focus our resources on higher growth, higher-margin opportunities. Our critical structure joint venture program is now more than 75% complete. We expect to reach over 80% by year-end and 85% at the end of the first quarter of 2027. We've increased executive oversight, strength and review frequency and initiated critical testing and commissioning activities to manage remaining cost and schedule risk. While the project remains exposed to factors outside of our control census weather, potential contract modifications and being the non-managing joint venture partner, we remain focused on disciplined execution in line with our current estimates. As a reminder, we have not pursued similar consortium projects since 2019. Before we review our financial and operational highlights for the quarter, I want to address the leadership transition we announced earlier today. As noted in our 8-K filing, Matt Atlas has decided to step down as Chief Financial Officer to pursue a new professional opportunity. On behalf of the Board and the entire Parson's team, I want to thank Matt for his dedicated leadership and financial stewardship over the past years. We wish him the best in his next chapter. To ensure a seamless transition, George Ball will be stepping into the interim CFO role effective November George brings decades of experience with Parsons Corporation, including years as the Parsons CFO. Since retiring, George has been serving on our Board of Directors and has deep familiarity with the company, immediate operational readiness and our proven track record. George's extensive experience and thorough institutional knowledge will ensure continuity and a seamless transition during this period. Turning to our third quarter financial results. Total revenue increased 2% year-over-year. Excluding our confidential contract, revenue increased with 2% organic growth. Adjusted EBITDA increased 6% and adjusted EBITDA margin expanded 40 basis points to 10.2%, a company record. Operating cash flow was $269 million, significantly exceeding our commitments. Critical infrastructure delivered record third quarter revenue and adjusted EBITDA margin, which exceeded 11% for the first time. Bookings were also strong. Total contract awards increased 14% year-over-year, resulting in a consolidated book-to-bill ratio of 1.1x. Federal Solutions was particularly strong, with awards increasing 53% year-over-year and a book-to-bill ratio of 1.2x. Critical Infrastructure delivered a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above that level. Through the first 9 months of 2026, Federal Solutions bookings increased 47% year-over-year, while credit card structure achieved a year-to-date book-to-bill ratio of 1.1x. As a result, consolidated year-to-date book-to-bill was 1.2x. The quality and strategic importance in these awards were equally encouraging. During the quarter, we received contract actions valued at more than $100 million each and continue to expand our use of other transaction agreements or OTAs. We won a $495 million ceiling value contract for a national security customer to acquire and deploy advanced communications, power and software capabilities. We booked $37 million on this contract in the third quarter. One of the quarter's most significant awards was the increase of the ceiling value of our 5-year sole source other transaction production contract with United States Cyber Command of $750 million. We secured this contract through our acquisition of Sealing tech and have now begun full rate production of the Joint Cyber Hike or JCHK. JCHK is a modular mobile cybersecurity system that enables joint cyber protection teams to rapidly detect, analyze and counter advanced cyber threats across the United States and Allied Networks. To date, we've booked $250 million under this contract including JCHK. Parsons now generates approximately $350 million annually in products and related service revenue, and we plan to continue to expand this portfolio across 6 product families. Biometrics and identity management, full spectrum warfare, command control emission planning, autonomy and counter An aircraft systems, space mission systems and infrastructure operations and resilience. In addition, this quarter, we booked $234 million of the $514 million, 2-year option period for the Missile Defense Agency's Teams next program. Under this program, we will continue providing engineering, technical, analytical and oversight support for the nation's integrated missile defense system, including efforts to address evolving ballistic missiles and hypersonic threats. We also won 4 new OTA awards with an aggregate ceiling value of more than $370 million and booked approximately $140 million under these agreements during the quarter. These awards include a 5-year $97 million OTA by a government customer to deliver technology to simulate radio frequency and cyber conditions. The company booked $4 million on this agreement during the quarter. We also received a 5-year $95 million other transaction agreement from a government customer to modernize software supporting early warning capabilities, and we booked $19 million in this agreement during the quarter. In addition, we were awarded a classified 3-year agreement with a $95 million ceiling to provide advanced national security solution, supporting operations in the Pacific theater. We've got $30 million on this agreement in Q3. We won a 75-month $86 million agreement to provide program and construction management support for the United States Base Command's new headquarters at Redstone Arsenal in Alabama. We booked the full value of this agreement. Collectively, these wins expand our presence across several strategic growth markets. The United States Space Command award also demonstrates the synergies between our Federal Solutions and Critical Infrastructure segments and highlights our continued growth in defense infrastructure. OTAs provide customers with a flexible path from technology development and prototyping through production and deployment. They're particularly well suited their critical missions such as cyber, countermand aircraft systems, electronic warfare and space and missile defense. We currently have 26 OTA contracts, including 12 awarded this year, representing $1.6 billion in total ceiling value. Our OTA pipeline totals approximately $2 billion, positioning us to continue expanding this important contracting vehicle. Today's defense environment is faster, more distributed, more contested and increasingly multi-domain. Meeting these challenges require solutions that are high-performing, affordable, rapidly deployable and scalable for sustained operations. Our purpose-built Federal Solutions portfolio is differentiated by the combination of speed, agility, affordability and mission reliability. We bring together proven hardware, mission software and secure deployment to deliver integrated systems that create measurable advantages for our customers. The administration's proposed FY '27 base defense budget of $1.15 trillion represents an increase of more than 28% over fiscal year '26 and aligns closely with Parsons differentiated capabilities and customer relationships. While the proposed budget remains subject to congressional approval and appropriations, its focus on missile defense, cyber, space, electronic warfare and industrial-based modernization reinforces our confidence in the long-term demand environment. With strong bookings and a strong pipeline, we believe Parsons is well positioned to support national security priorities and deliver capabilities at the speed and agility required by the Department of War. Funding decisions, protests and procurement may affect revenue conversion, but we view those as timing considerations rather than indicators of demand. We also expect growth as existing vehicles are funded and has classified capabilities, recently awarded programs and new products ramp. The same principles extend across critical infrastructure. Infrastructure owners are seeking assets that are more resilient, connected and intelligent and they need partners who can help them navigate the full life cycle from planning and design through construction, operations and optimization. Parsons combines deep infrastructure expertise with digital engineering, data analytics, and secure technology to transform complex systems into higher performing, more resilient assets. By connecting physical infrastructure with digital intelligence, we hope customers make better decisions, improve performance and create measurable value. Demand remains healthy across our credit infrastructure segment in both North America and the Middle East and this is reflected in the segment's 24th consecutive quarter with a book-to-bill ratio of at least 1.0x. In North America, demand remains strong across transportation, environmental and water and wastewater projects. Only 48% of the infrastructure investment in Jobs Act funding has been spent as of August 2026 and the proposed Build America 250 Act would authorize at least $580 billion of surface transportation funding through 2031, if enacted. This includes historic bridge investments, permitting reforms and increased formula-based funding to 90%. The Middle East also remains a resilient and attractive long-term growth market, supported by investment in transportation, urban development, aviation modernization, major regional events and broader economic transformation. We also see emerging opportunities in the Middle East and countermand air system, cyber defense, integrated era missile defense, desalination and the protection of critical infrastructure. Our Middle East net headcount has increased every month in 2026. These trends reflect our continued investment in the region, the strength of our brand and our confidence and long-term growth prospects. While the infrastructure market remains attractive, recent growth has been moderated due to lower pass-through revenue in North America and broader geopolitical uncertainty. In summary, we believe the third quarter demonstrated the strength and differentiation of our portfolio. We exceeded our commitments for revenue, adjusted EBITDA, adjusted EBITDA margin and operating cash flow while strong book-to-bill ratios and healthy demand reinforced the resilience of both segments. Combined with our greater than $50 billion pipeline, strong win rates, total backlog of $9.4 billion, of which 73% is funded and $12 billion of awarded contracts not yet booked. We believe these results provide us with a solid foundation for attractive long-term organic growth and value creation for our shareholders. With that, I'll turn the call over to Matt to provide more details on our third quarter financial results. Matt?

Thank you, Carey. Serving as a Parsons CFO under her leadership has been an incredible privilege. I'm proud of all that our team has accomplished and have tremendous confidence in the company's future. I'll remain a committed part on supporter for years to come. With that, let me get into the details of the Q3 results. . Third quarter was highlighted by exceeding our prior commitments and delivering solid performance across the company. We will continue to focus on disciplined execution to drive long-term growth and shareholder value. With book-to-bill ratios at or above 1.0x in both segments for the third consecutive quarter, revenue growth of 5%, excluding the confidential contract, a record third quarter adjusted EBITDA margin of 10.2% and operating cash flow of $269 million. We believe the strength of the portfolio will continue to drive long-term growth and margin expansion. Turning to the details of our third quarter results. Total revenue grew 5% and 2% on an organic basis, excluding the confidential contract. These increases were driven by growth in our cyber and electronic warfare and transportation markets. Highlights included strong growth on new and existing contracts to include JCHK, classified identity management contract and our FAA work. Total revenue, including the confidential contract increased 2% from the prior year period and was down 1% on an organic basis. We anticipate accelerating Federal Solutions growth over the next several quarters, supported by strong book-to-bill ratios over the past 3 quarters and the expected resolution of over $850 million in contract wins that are currently under protest. SG&A expenses for the third quarter increased 10% from the prior year period, primarily driven by acquisitions and technology investments that are in line with expectations. Record adjusted EBITDA of $168 million increased 6% from the prior year period. Adjusted EBITDA margin expanded 40 basis points to a record 10.2%. These increases were driven by accretive growth across both our Infrastructure and Federal segments. I'll now turn to our operating segments, beginning with critical infrastructure. Record third quarter revenue of $846 million increased 2% year-over-year, driven by 1% organic growth and contributions from our Applied Sciences acquisition. Organic growth includes strength in our transportation market and growth in the Middle East despite the ongoing geopolitical uncertainty. Adjusted EBITDA increased 9% year-over-year to $94 million, while adjusted EBITDA margin expanded 80 basis points to 11.1%. Revenue, adjusted EBITDA and adjusted EBITDA margin all set new records for the segment reflecting the ramp-up of recent awards, contributions from accretive acquisitions and stronger program execution. Moving to our Federal Solutions segment, where third quarter revenue, excluding the confidential contract increased 9% year-over-year and 3% on an organic basis. Growth was driven by strength across our cyber and electronic warfare and transportation markets. including the confidential contract, total segment revenue increased 2% year-over-year and declined 3% organically. Federal Solutions adjusted EBITDA increased 2% year-over-year, while adjusted EBITDA margin remained unchanged at 9.2%. The increase in adjusted EBITDA was primarily driven by contributions from acquisitions and growth on accretive contracts. Next, I'll discuss cash flow and balance sheet metrics. Our net DSO at the end of Q3 was 70 days, 8 days above the prior year period, mainly due to the conclusion of our confidential contract in Q1 of 2026. Compared to Q2 2026, our DSO improved by 6 days on strong cash collections. During Q3, we generated $269 million of operating cash flow compared with $163 million in the third quarter of 2025. On a trailing 12-month basis, we generated $490 million in operating cash flow an increase of 12% over the prior 12-month period. These increases were driven primarily by strong collections across the entire portfolio. Capital expenditures totaled $18 million in the third quarter. Looking ahead from the fourth quarter, we expect CapEx to increase sequentially as we continue to invest in classified facilities and reach critical milestones related to enterprise systems upgrades that support Parsons long-term growth and enhanced efficiency across the business. Trailing 12-month free cash flow conversion was 130%. Our balance sheet remains strong as we ended the third quarter with a net debt leverage ratio of 2.1x. During the third quarter, we repurchased 1.3 million shares for $60 million. Year-to-date, share repurchases have totaled $110 million, an increase of nearly 70% from the prior year period. We have increased share repurchases given our view that the current stock price does not fully reflect Parsons long-term value. We also continue to invest organically to differentiate our capabilities and we'll selectively pursue accretive acquisitions that strengthen our win rates and ability to capture large programs through differentiated technology. Turning next to bookings. We secured $1.8 billion in contract awards during the third quarter, an increase of 14% year-over-year. This resulted in a consolidated book-to-bill ratio of 1.1x for the quarter. Our book-to-bill ratio was 1.2x for the first 9 months of the year and 1.1x on a trailing 12-month basis, supporting our future growth outlook as recently awarded programs ramp. Both segments delivered solid bookings. Critical Infrastructure achieved a book-to-bill ratio of 1.0x, marking its 24th consecutive quarter at or above 1.0. In Federal Solutions, contract awards increased 53% year-over-year resulting in a book-to-bill ratio of 1.2x for both the third quarter and on a trailing 12-month basis. At the end of the third quarter, total backlog reached a record $9.4 billion, up 6% year-over-year, while funded backlog was up 7% and reached a record $6.8 billion, representing 73% of total backlog funded. Now let's turn to our guidance. Based on our year-to-date performance and enhanced operational visibility, we are narrowing our revenue and adjusted EBITDA guidance ranges provided on July 29. For fiscal year 2026, we now expect revenue in the range of $6.25 billion to $6.45 billion and adjusted EBITDA between $510 million and $515 million. While Q3 cash flow was strong, we are maintaining our operating cash flow guidance range of $430 million to $490 million due to the uncertain geopolitical environment. These guidance ranges are outlined in our earnings press release and PowerPoint presentation, both of which are located on our Investor Relations website. Slide 12 of the presentation provides additional key assumptions that support the midpoints of our 2026 guidance ranges, which we believe remain the appropriate basis for modeling our full year results. In summary, our third quarter results reflected solid performance across our portfolio, including book-to-bill ratios at or above 1.0x in both segments, record profitability and healthy cash generation. We remain focused on disciplined execution and delivering on our commitments to drive sustainable, long-term shareholder value. With that, I'll turn the call back over to Carey.

Thank you, Beth. This quarter, we exceeded all of our financial commitments delivering record profitability, excellent cash generation, strong bookings, a record total and funded backlog while expanding our products and other transaction agreement portfolio and strategically repositioning the business towards higher growth, higher margin work. As we look ahead, our priorities Circle, consistent execution in converting our strong pipeline at recent awards and a profitable growth. While we continue to navigate procurement timing and geopolitical uncertainty, the alignment of our capabilities with our customers' most critical national security and infrastructure needs and demand for our differentiated solutions supports our confidence in Parsons long-term outlook. We will remain disciplined in deploying capital and focused on delivering for our customers, employees and shareholders. With that, we'll now open the line for questions.

[Operator Instructions] Now first question coming from the line of Sheila Caiano with Jefferies.

Matt, congratulations on your move, and you'll be missed. Maybe to Carey, I guess, how do you think about just the future growth outlook sticking to Federal Solutions. When we look, awards are up almost 50%, book-to-bill is 1.3x. Yet organic growth ex the confidential program is running at low single digits. So I guess what's your line of sight to improvement? You also just mentioned funded backlog is a pretty good statistic. So I guess, how are you thinking about growth as we head into 2027?

Yes. Thanks, Sheila. So I'd say we're very positive on SSS growth. When you look at the book-to-bill, as you pointed out, year-to-date, it's very strong at 1.3x. We've been awarded over 12 different contract actions, greater than $100 million since the start of the year. The majority of those have been in federal. And in addition to what we talked about as far as the wins, we currently have $850 million awarded to Parsons over a 5-year period that's under protest and another $495 million that's still in the protest period. So the Federal group definitely has some momentum behind it and funded backlog is significantly up for federal. The goal now is really how quickly we can convert those awards into revenue, and that's where we're laser-focused.

Okay. Maybe a follow-up on that. I guess, as we think about organic growth from the low single digits, should it accelerate next year? And are there 1 or 2 programs that are driving that growth and any of that fall off for FS only?

Yes. So as far as programs that are driving the growth, I would say all the recent new wins, the classified biometrics identity win all the other transaction awards that we've received, which include programs that are basically already full of work like Joint Cyber Hot Kit at $750 million or the Space Command headquarters new award. So those would be some of the key FAA continues to be very strong. We're up 40% year-over-year in FAA, and we see that effort continuing as we go into next year and the air-based Air Defense as well as additional point defense activities remain very strong. We're also doing well on our Defense Threat Reduction Agency Citric contract being the #1 awardee there and Department of Energy Counternuclear systems, bundling and deterrents we're the #1 award there. So a lot of trajectory in the federal area. As you're aware, we haven't yet provided formal 2027 guidance. As we looked in 2027, we're very confident in the strength of our record backlog. We have $12 billion of awarded contracts to Parsons that we have not yet reflected in bookings and more than $50 billion of our qualified pipeline with over 109 opportunities, greater than the $100 million that are in that pipeline. But that's we are in a dynamic environment and contract awards are taking longer to convert to revenue. And we do also face some uncertainty related to midterm geopolitical conditions in the Middle East and as I mentioned, the elevated level of protests, which we're waiting to clear. So the good news is, as we get closer to reporting our fourth quarter earnings, we should have better line of sight, particularly on the protest status. We're still confident in Parsons ability to deliver our long-term guidance, which we've indicated is mid-single digit or better and double-digit margins by 2028. Although we are going to be cautious that some of the macro headwinds that we experienced in 2026 could persist into 2027. So we look forward to providing our full year guidance on our fourth quarter earnings call in February 2027, which is consistent with what we've done in prior years.

Our next question in queue coming from John Golan with Citi.

I wanted to just follow up on this year's guidance. You guys narrowed the range, which completely makes sense. There's still a good amount of range with 1 quarter left in the year, and it could be a complicated quarter with, I guess, news out there of the possibility of a significant escalation in a Iraq, I'm sorry, in Iran after the midterms as well as the midterm themselves, and we'll see how that shapes out. I was just hoping maybe we could dialogue a little bit on low end versus high end and any puts and takes and risk factors to think about for 4Q kind of driving the range?

Yes. Thanks, John. I'll take that one. I'll probably go on the first order. On the cash flow, to your point, we had an exceptional quarter in Q3. I think we see the opportunity to continue to deliver cash levels at similar levels. However, given the uncertainty, specifically in the Middle East, we've been a bit more conservative on the forecasting there and giving ourselves a little bit more wiggle room at the midpoint. So I'd say on the cash side, probably some opportunity trending between midpoint and higher end on the cash. Revenue, really strong quarter. Again, kind of derisk Q4. We see a little bit of a decel in Q4 from Q3 but mainly that's the seasonality on programs like and some of the Canada mine jobs and access there. So if things like protests unwind earlier, we have no revenue in from kind of new, new and the protest on line. So the tailwinds or trending toward the higher end of guide would be on protest and continued performance similar to what we had in Q3 on the revenue side. On EBITDA, I think you'll see with Q3's performance, it's kind of a flat Q3 to Q4. So obviously, risks and opportunities to EBITDA are always performance related and operational. So no real risk there in terms of the margins on the executing programs. It would just be maybe higher -- opportunity would be higher volume on products like JCHK and different things and risk would be any unexpected execution issues.

Got it. Very helpful. And in the slides, there was this note about strong contract win rates. Clearly, you guys are producing some wins. We don't have perfect clarity into what the funnel looks like and how much you're out there bidding. Carey, I think in the last question, you mentioned a very large qualified pipeline. Can you just plug us into the funnel here and how you're kind of thinking through the funnel as we go into 2027?

Yes. So we expect this year, we're going to bid roughly the same amount as we did last year. So on the order of about $19 billion of proposals submitted and again, I'll highlight that our pipeline has been greater than $50 billion for 11 consecutive quarters, so very strong pipeline. 109 opportunities greater than $100 million. So strong funnel. If you look at the pipeline, it's broken up about $30 billion of that comes from federal with about $23 million from critical infrastructure.

And John, just 2 things I would add the Carey mentioned earlier, the North of $12 billion, that's the highest level that's been since 2024, which is a really good sign. Obviously, those things are easy to turn into backlog quicker than kind of new, new pursuits. And then on top of that, we have just about $5 billion awaiting notice of award.

Our next question coming from the line of Galtman with TD Securities.

Yes. Congrats, Matt.

Thanks.

Just wanted to follow up on a couple of things. First, on the JV project in Canada that you talked about, what is the remaining kind of charge exposure, if there is any, given the timing of the project? Is it -- just if you could calibrate like how is that considered in the guidance for this year? And is that something that could slip out to next year with the potential charge? I'll follow up.

Yes. Great question, Ganem. As I mentioned on the call, the project is over 75% complete as of today. . And we expect to be 80% by year-end, 85% by the end of the first quarter. One thing that we did throughout the quarter since June when we had in June and July, the historic rainfall to mitigate the weather risks, we resequenced the work so that we prioritized all the critical activities before the end of this year, and we move work to the right that could be performed during the winter months. We're also working with customer on requested relief for historical weather and other events. And that's not included in our forecasted final completion date of June 2028. If that schedule were to extend beyond June 2028 or other risks would materialize there could be additional costs or joint venture investment required. But as you point out, as the project advances and nears completion, we expect the nature and the potential impact of those remaining issues to be less significant than what we experienced historically. As a reminder, this 50-50 joint venture project, we're the non-managing partner and we have not pursued any similar consortium projects since 2019.

Okay. So there's no assumed charge in the fourth quarter guide. Is that fair?

No.

Okay. I also wanted to just ask at 1 point, we were talking about 3 larger CI projects that you guys were pursuing. I think we talked about it last quarter on the earnings call. Could you give us an update on where those stand?

Yes, on the line that was announced, the concessionaire of the team that was announced as the winner basically bid 5x the concession fee of any of the 3 other bidders. Our concessionaire has protested that award.

Our next question in queue coming from the line of Jonathan Sigman with Stifel.

Best wishes, Matt.

Thanks, John.

I appreciate you guys qualifying product revenue base today. I was just -- can you frame how we should think about the margin difference between products and those services relative to the base federal solutions. And then you had previously mentioned over 30% growth for Cyber Hunt. Is that specific to that product line or that product broadly? Just trying to gauge how much faster that vertical could grow relative to the base.

Yes. I'll start off on the growth. So as we mentioned and the met will hit the margin, we have $350 million of products and related services in 2026 and we're expecting an increase of between 20% to 30% of our overall products as we go into 2027. That's based on joint cyber Hunt kit, but also other products, including our TRx threat emulation system, our churn position navigation and timing system, our command and control core system, our biometrics and identity management as well as our -- some of our RF capabilities and our tax situational awareness system and some of our space products and our intelligent network products. So quite a robust product portfolio.

Yes. John, relative to margin, I'd say it obviously ranges, I would say, I'll talk generally about products. But I'd say a lot of the product revenue we have today, JCHK specifically was going through LRIP and some of the other programs are still kind of early investment and and growing. So I would say we expect margins on products in general to be north of 20%. Some of the bigger ones will be right around that plenty, but others are even kind of in the 40% range. So if you think about products as a whole 2x what let's call it kind of high or mid- to high 90s, that Fed should be -- that's probably a good target. So if we can grow products 20% or 30% again next year at 20-plus percent margin, that would be a good story.

Our next question in queue coming from the line of Gavin Parsons with UBS.

Start to come back on the charge risk contract on CI. I thought last quarter, you said the plan was to be 90% complete by the end of this year. So I just wanted to check if that means you buffered some or accommodated for some additional overrun already in the charge that you previously took?

Yes. What we did, Kevin, is because we had the historic rainfall in June and July, we decided to resequence the work and that it would be better that we could get to an earlier testing and commissioning phase. So it was intentionally roofing work around to optimize resources. By doing that, that enabled us to reduce our cost and reduce some headcount this year so that we can surge it after the new year.

Okay. And then on the OTAs, clearly, a lot of wins there. I think some of those have been slower to ramp and you had a lot of language this morning around funding decisions and procurement. Any progress on those OTAs transitioning from awarding to funding?

Yes. So we have had progress. Again, I'll point out 2 of them are kind of fully scoped from the beginning, which are 2 of the bigger OTAs. That would be the Joint Cyber Hunt kit where there's a requirement to deliver approximately 74 kits per year for 3 years. And then the Space Command headquarters, which we fully booked and is fully ramped. So those 2 make up a good portion of what we've already booked. And then we have the OTs that we announced last year, we've already started to receive funding on those. The good news is the scope that we're doing on the majority of the OTAs is focused on the Endo Paycom region, the near Purefit cyber space, missile defense, electronic worker, all areas that are in heavy demand by the department award as well as the intelligence community.

Our next question in queue coming from the line of Andrew Wittmann with Baird.

All right. Matt, we'll miss, George, welcome back. Glad to have you. I guess I'm going to ask 1 of the first questions here on the CI segment. I just -- the organic growth rates here have been kind of low -- the change over the last quarter here is around the Middle East. Last quarter, the Middle East was pretty good, even though some of the turbulence is already affecting the region this quarter, a little bit of a decel. So I just -- Carey, I was hoping you could maybe address what you saw in the quarter and how that bodes for the future. Obviously, there's tons of uncertainty here. But I just wanted to kind of think about it like you're thinking about it. And even in North America here, we've been seeing kind of across the board some deceleration in some of the organic growth rates for not just your company but for peers as well. Just want to make sure we're thinking about what the realistic organic growth rates for that business are. Obviously, you're going to point to the backlog, and that's been pretty consistent here. But just want to try to think about like that, what you're seeing there and think about it like you're thinking about it, please?

Yes, sure. Thanks, Andy. So again, we've had greater than 24 consecutive quarters greater than 10 book-to-bill, which flecks very strongly on the demand for both the Middle East as well as for North America. . During the quarter, there was some slow in Saudi, which makes up 65% of our Middle East business and that was due to a rephasing of programs by the public investment funds. So you can think about that as timing as well as award timings. So their focus right now is on any program that is based around Riyadh, so that they can get to the Expo and the World Cup events in 2030 and 2034. So this quarter, while we were at 0.8 book-to-bill for the Middle East, we are -- believe we're going to exceed 1.0 back for Q4 and the reason is that in Q4, we get our annual renewals on our large programs, such as -- just on India, as an example. In the Middle East, we're very happy. Last week, we had record billable hours, and we've had, as I mentioned on the call, an increase in net headcount every single month throughout 2026. So demand remains strong. I think there are some timing issues that are happening in Saudi Arabia. On the other side, again, of the conflict, though, we do see opportunities to include areas like rebuild, how do you possibly and actively protect various assets like data centers, utilities and water. So in addition to our kind of our core critical structure business, we see some expansion opportunities into new market areas. In North America, if you take out lower pass-through, we mentioned that some of our larger design programs had peaked, which includes Hawaii rail and transit, the newer caratrain program and the Georgia State Route 400, those had a lot of pass-through. So excluding the pass-through, we're actually up 4.5% organic and the good news, excluding the pass-through, that's driving our higher margins that we've been able to realize in critical infrastructure.