Parsons Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Parsons provides engineering, technical, software and infrastructure services through Federal Solutions and Critical Infrastructure. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,008.7 million | $879.4 million | $1,957.8 million | $1,754.1 million |
| Operating income | $32.6 million | $20.2 million | $68.3 million | $45.8 million |
| Net income attributable to Parsons | $18.3 million | $6.7 million | $39.0 million | $15.7 million |
| Diluted EPS | $0.17 | $0.06 | $0.35 | $0.15 |
| Adjusted EBITDA | $77.4 million | $65.7 million | $151.7 million | $134.4 million |
- Q2 revenue increased 14.7%; six-month revenue rose 11.6%. Federal Solutions grew 21.4% in Q2 and Critical Infrastructure 7.9%.
- Q2 operating margin was 3.2% versus 2.3%; adjusted EBITDA margin was 7.7% versus 7.5%. Six-month adjusted EBITDA margin was 7.7% in both periods.
- Operating cash flow was $25.3 million for the first half, down from $38.5 million. The company attributed the decline primarily to working-capital cash outflows, including receivables and contract assets.
- Cash, cash equivalents and restricted cash were $126.9 million at June 30, down $217.0 million from year-end. Working capital was $484.8 million, versus $601.6 million at December 31, 2021. Net DSO increased to 72 days from 68 a year earlier.
- Long-term debt was $793.0 million, including $200 million outstanding on the revolving facility, $200 million in senior notes and $400 million in convertible notes. The revolver rate was 3.22% at June 30, versus 1.36% at year-end. The company reported compliance with debt covenants.
Material changes and business developments
- Parsons acquired Xator Corporation on May 31 for $388.3 million in cash, partly funded with $300 million borrowed under its revolving credit facility. Xator contributed $20.8 million of revenue in the quarter. Preliminary purchase accounting included $260.8 million of goodwill and $116.1 million of intangible assets.
- Q2 Federal Solutions adjusted EBITDA attributable to Parsons rose 46.6% to $47.6 million; Critical Infrastructure fell 9.6% to $25.2 million. Management cited acquisition contributions and comparison with a prior-year project write-down for Federal Solutions; Critical Infrastructure faced growth-investment SG&A, legacy-program cost adjustments and program completions.
- First-half awards totaled $1.91 billion, down from $2.69 billion; book-to-bill was 1.0 versus 1.5. Backlog was $8.23 billion, compared with $8.41 billion a year earlier. Remaining unsatisfied performance obligations were $5.8 billion.
- The company repurchased 427,088 shares in the first half for $15.5 million; $62.8 million remained under its $100 million authorization.
Outlook, risks and contingencies
- Management said liquidity and capital resources were adequate to fund operations, debt service and the acquisition strategy for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management expects to recognize $3.2 billion of funded backlog as revenue in the following 12 months. Backlog includes unfunded work, probable options and unissued task orders; federal customers may reduce funding, cancel contracts or not exercise options.
- Risks discussed include federal budget uncertainty and procurement delays, government audits and contract-cost disallowances, competition for skilled and cleared staff, contract execution and fixed-price cost overruns, and working-capital and interest-rate exposure.
- A False Claims Act qui tam case was remanded to federal district court after appellate and Supreme Court proceedings. Parsons said it cannot determine the probability of outcome or a potential loss range. The company also faces ordinary-course claims, asbestos-related suits and ongoing government contract audits; management did not expect these matters to materially affect results, while noting outcomes are uncertain.
- Goodwill was $1.67 billion at quarter-end, substantially increased by Xator; management’s qualitative review found no impairment trigger. The Xator purchase-price allocation remained preliminary.
Investor items to verify
- Whether awards and book-to-bill recover, particularly in Federal Solutions, and how much backlog is funded and converts to revenue.
- Receivables, contract assets, collections and Net DSO, given the first-half operating cash-flow decline.
- Xator integration, final purchase accounting, acquisition-related costs and the additional debt burden.
- Critical Infrastructure margin trends and the effect of program completions, cost adjustments and growth investments.
- Developments in the False Claims Act matter, government audits and other contingencies, as well as floating-rate borrowing costs.