Parsons Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Parsons provides technology, engineering and mission-support solutions in defense, intelligence and critical infrastructure through Federal Solutions and Critical Infrastructure. This filing covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods. Financial amounts below are in U.S. dollars, millions, unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $879.4 | $979.5 | $1,754.1 | $1,950.5 |
| Operating income | $20.2 | $46.3 | $45.8 | $70.0 |
| Operating margin | 2.3% | 4.7% | 2.6% | 3.6% |
| Net income attributable to Parsons | $6.7 | $23.3 | $15.7 | $36.3 |
| Diluted EPS | $0.06 | $0.23 | $0.15 | $0.36 |
| Adjusted EBITDA (non-GAAP) | $65.7 | $91.2 | $134.4 | $151.7 |
| Adjusted EBITDA margin (non-GAAP) | 7.5% | 9.3% | 7.7% | 7.8% |
- Q2 revenue fell 10.2%; Federal Solutions revenue declined 8.2% and Critical Infrastructure 12.2%. For the first half, revenue declined 10.1%.
- Six-month operating cash flow was $38.5 million, versus cash used of $31.4 million in 2020. Investing activities used $19.8 million and financing activities used $22.3 million. Cash, cash equivalents and restricted cash declined $2.6 million from year-end to $484.6 million.
- At June 30, cash and cash equivalents were $483.4 million; total debt was $640.9 million, comprising $50.0 million short-term and $590.9 million long-term. The $50 million senior-note tranche due July 2021 was repaid after quarter-end.
- Working capital was $717.0 million; management reported adequate liquidity for operations, debt service and its acquisition strategy for at least 12 months. The $650 million revolving facility had no borrowings outstanding; $45.0 million of letters of credit reduced availability. Other bank-line letters of credit totaled $219.2 million.
Material changes and operating drivers
- Lower revenue reflected program completions and wind-downs in both segments, including Critical Infrastructure programs with high pass-through costs. Federal Solutions also cited a competitive hiring environment for cleared staff.
- Federal Solutions Q2 Adjusted EBITDA attributable to Parsons decreased 31.9% to $32.5 million, affected by a $6.9 million net program-reserve impact and comparison with a $9.0 million incentive fee in Q2 2020.
- Critical Infrastructure Q2 revenue fell 12.2% to $436.7 million and segment Adjusted EBITDA fell 21.7% to $27.8 million. Management cited a $15.4 million project write-down, partly offset by higher equity earnings from unconsolidated joint ventures.
- Revenue revisions on performance obligations partly satisfied in prior periods reduced Q2 and first-half 2021 revenue by $20.8 million, compared with a $9.0 million increase in the 2020 periods.
- Despite lower revenue, awards and backlog increased: first-half awards were $2.69 billion versus $1.97 billion; book-to-bill was 1.5 versus 1.0; backlog was $8.41 billion versus $7.72 billion at June 30, 2020. Backlog includes amounts dependent on future funding, task orders or option exercises. Remaining unsatisfied performance obligations were $5.1 billion.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management said it expects no material COVID-19 impact on financial condition or results, while noting continuing uncertainty. Work-from-home arrangements remained largely in effect; site-access restrictions and delayed potential awards had affected work volume, but the company reported no substantive cancellations of awarded contracts.
- COVID-related risks include customer site restrictions, award delays, and possible collection or operating disruption. Other highlighted risks include federal budget and spending uncertainty, contract audits and compliance, competition for cleared personnel, and potential tax-law changes.
- In June 2021, Parsons replaced its prior revolver with a five-year, unsecured $650 million facility, up from $550 million. The company reported compliance with debt covenants at June 30.
- Parsons completed the $203 million cash acquisition of BlackHorse Solutions on July 6, 2021 and the approximately $9 million cash acquisition of Echo Ridge on July 30, 2021. These are subsequent events, not included in June 30 balances.
- Material litigation disclosures include a customer claim seeking more than $100 million relating to a terminated positive train control project; Parsons disputes the claim and cannot estimate the likelihood or potential loss. A False Claims Act case was remanded to district court; outcome and potential loss are also not estimable. Management stated ordinary-course claims are not expected to materially affect the company, but outcomes are uncertain.
- The company recorded $5.1 million of first-half write-downs on an unconsolidated joint venture. The filing also reports an $18.0 million liability for uncertain tax positions and a $31.3 million valuation allowance on deferred tax assets.
Important facts for investors to verify
- Whether the elevated backlog converts to funded orders and revenue on expected schedules, particularly the unfunded Federal Solutions backlog.
- Whether revenue and margins recover after program wind-downs, reserves and project write-downs, and how future estimate revisions affect contract profitability.
- Cash conversion and working-capital trends, including collection timing and the use of revolver capacity after the July debt repayment and acquisitions.
- Integration, purchase-price accounting and expected performance of BlackHorse and Echo Ridge.
- Developments in the positive train control and False Claims Act litigation, government contract audits, and uncertain tax positions.