Parsons Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Parsons provides technology, engineering, and other solutions through Federal Solutions and Critical Infrastructure. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,004.2 million | $1,023.3 million | $2,954.7 million | $2,917.4 million |
| Operating income | $66.3 million | $53.4 million | $136.2 million | $67.8 million |
| Net income attributable to Parsons | $40.7 million | $56.8 million | $76.9 million | $106.8 million |
| Diluted EPS | $0.40 | $0.57 | $0.76 | $1.19 |
| Adjusted EBITDA | $100.8 million | $89.0 million | $252.5 million | $237.2 million |
| Adjusted EBITDA margin | 10.0% | 8.7% | 8.5% | 8.1% |
| Net income margin, including noncontrolling interests | 4.6% | 6.0% | 3.1% | 3.9% |
Q3 revenue declined 1.9% year over year, while operating income rose. Federal Solutions revenue increased 2.5%; Critical Infrastructure revenue fell 5.8%. Parsons-attributable segment Adjusted EBITDA increased 43.8% in Critical Infrastructure but declined 8.9% in Federal Solutions. For the nine months, revenue grew 1.3%, while Parsons-attributable net income fell 28.0%. The 2019 comparison is affected by the company’s conversion from S corporation to C corporation status and related nonrecurring tax benefits; Q3 2019 included a $29 million tax benefit from deferred-tax remeasurement.
Cash flow, balance sheet, and liquidity
- Operating cash flow: $113.4 million for the first nine months, versus $130.6 million in 2019. Management cited working-capital outflows, including receivables and contract liabilities, partly offset by accrued expenses and contract assets.
- Investing cash flow: $36.1 million used, compared with $541.7 million used in 2019, which included the OGSystems and QRC acquisitions. Capital expenditures were $29.2 million.
- Financing cash flow: $345.1 million provided, including convertible-note proceeds. Cash, cash equivalents, and restricted cash increased $422.4 million to $617.8 million.
- Cash and working capital: September 30 cash and cash equivalents were $614.0 million; working capital was $835.1 million. Cash includes $50.6 million held by consolidated joint ventures, which is restricted to their use.
- Debt: Total debt was $587.1 million, including $50.0 million short-term senior notes, $200.0 million senior notes, and $400.0 million principal on 0.25% convertible notes due 2025, partly offset by discounts and issuance costs. No borrowings were outstanding under the $550 million revolving facility; stated available liquidity, including cash and unused credit, was $505.1 million.
- Receivables: Accounts receivable, net, were $775.1 million and contract assets were $610.9 million. Net DSO rose to 69 days from 58 days a year earlier. Management reported administrative payment delays but did not expect customer nonpayment.
Material changes and operating indicators
- Q3 Federal Solutions revenue rose $12.0 million, while Critical Infrastructure revenue declined $31.0 million, mainly due to lower pass-through activity and programs nearing completion.
- Q3 Federal Solutions Adjusted EBITDA was pressured by lower margins on contracts with increased pass-through costs. Critical Infrastructure Adjusted EBITDA improved with higher joint-venture earnings and lower indirect expenses.
- Year-to-date awards were $3.14 billion, down from $3.33 billion. Backlog was $7.78 billion, versus $8.25 billion a year earlier; year-to-date book-to-bill was 1.1. Management expects to recognize $2.6 billion of funded backlog in the next 12 months. Remaining unsatisfied performance obligations were $5.0 billion.
- Convertible notes issued in August raised $400 million principal. The company also purchased a note hedge and sold warrants; management says these transactions reduce potential dilution up to a $66.46 share price, subject to their terms.
Outlook, risks, and unusual items
- Outlook: The filing gives no numerical revenue or earnings guidance. Management said it had adequate resources for operations, debt service, and its acquisition strategy for at least 12 months, and currently anticipated no material change in financial condition or results from COVID-19.
- COVID-19: Most employees continued working remotely. Parsons reported no material work disruption or substantive cancellations, but customer site-access restrictions affected work volume and some prospective awards were delayed. The ultimate impact remains uncertain.
- Acquisition after quarter-end: On October 29, 2020, Parsons announced an agreement to acquire Braxton Science & Technology Group for an estimated $300 million, expected to be funded entirely with cash.
- Legal and contract exposures: A California rail-project dispute includes claims exceeding $100 million; Parsons disputes the claims and cannot estimate the likelihood or potential loss. The filing also describes a remanded False Claims Act case, a patent-infringement suit, asbestos claims, and continuing government contract audits. Management did not expect ordinary-course matters to materially affect results, but specific outcomes remain uncertain.
- Other considerations: Backlog includes unfunded work, probable options, and unissued task orders; government customers may cancel contracts or decline options. The company reported covenant compliance. It found no goodwill impairment trigger and reported no material off-balance-sheet arrangements.
Investor verification priorities
- Track collection of receivables, DSO, contract assets, and the effect of customer payment delays on operating cash flow.
- Assess the funding, timing, and conversion of backlog and RUPO, especially unfunded federal work and delayed awards.
- Review the $300 million BSTG acquisition’s closing, cash funding, and effect on liquidity and debt.
- Evaluate convertible-note terms, potential dilution, and the economic impact of the note hedge and warrants.
- Monitor COVID-19 effects, the major rail-project litigation, other disclosed claims, and government contract audit outcomes.