Parsons Corporation (PSN) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Parsons provides technology-driven solutions in defense, intelligence, and critical infrastructure through its Federal Solutions and Critical Infrastructure segments. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $956.1 | $1,004.2 | $2,710.1 | $2,954.7 |
| Operating income | $39.7 | $66.3 | $85.6 | $136.2 |
| Net income attributable to Parsons | $19.4 | $40.7 | $35.1 | $76.9 |
| Diluted EPS | $0.18 | $0.40 | $0.33 | $0.76 |
| Adjusted EBITDA | $84.4 | $100.8 | $218.8 | $252.5 |
Revenue declined 4.8% in Q3 and 8.3% year to date. Operating margin was 4.2% in Q3 versus 6.6% a year earlier, and 3.2% year to date versus 4.6%. Adjusted EBITDA margin was 8.8% in Q3 versus 10.0%, and 8.1% year to date versus 8.5%.
- Segment trends: Q3 Federal Solutions revenue was essentially flat at $499.3 million, while Critical Infrastructure revenue fell 9.7% to $456.8 million. Critical Infrastructure Adjusted EBITDA attributable to Parsons decreased 37.8% to $30.4 million; Federal Solutions Adjusted EBITDA attributable to Parsons increased 1.3% to $46.5 million.
- Cash flow: Operating cash flow was $115.7 million for the first nine months, compared with $113.4 million. Investing cash outflow was $230.5 million, primarily reflecting acquisitions; financing cash outflow was $95.7 million. Cash, cash equivalents, and restricted cash declined $210.5 million to $276.7 million.
- Liquidity and debt: Working capital was $525.9 million, down from $655.7 million at year-end 2020. Debt totaled $591.4 million, versus $590.0 million; no amount was drawn on the $650 million revolving facility. The company reported covenant compliance and adequate liquidity for at least the next 12 months.
Material changes and operating developments
- Q3 and year-to-date revenue declines were primarily driven by lower Critical Infrastructure volume, including program completions and reduced pass-through revenue. Federal Solutions year-to-date revenue also declined, partly due to program wind-downs, a program reserve, and competition for cleared personnel.
- Parsons acquired BlackHorse Solutions for $205 million and Echo Ridge for $9 million in cash during Q3. The acquisitions expanded cyber/electronic warfare, intelligence, and space capabilities. Acquisition-related amortization and costs contributed to higher SG&A.
- Year-to-date awards were $3.74 billion, backlog was $8.58 billion (up from $7.78 billion a year earlier), and book-to-bill was 1.4. Remaining unsatisfied performance obligations were $6.0 billion; management expected to recognize $2.9 billion of funded backlog over the next 12 months.
- Unconsolidated joint-venture write-downs were $5.5 million in Q3 and $10.6 million year to date, reducing diluted EPS by $0.04 and $0.07, respectively. Contract estimate revisions reduced revenue by $6.3 million in Q3 and $27.6 million year to date.
Outlook, risks, and contingencies
The filing provides no specific financial guidance. Management said it expected no material change in financial condition or results from COVID-19, while noting continuing uncertainty. Site-access restrictions and delayed potential awards had affected work; management reported no material disruption, substantive cancellations, or expected material supplier nonperformance.
- Risks include federal budget and procurement delays, contract funding and cancellation, competitive hiring for cleared personnel, government audits, and changes in tax law. Management noted a proposed federal vaccination-or-testing requirement could cause employee attrition and adversely affect revenue or costs.
- Backlog includes unfunded work, probable options, and anticipated task orders; it is not guaranteed revenue. Federal contracts may be terminated or options not exercised.
- During Q3, Parsons settled its dispute with the Peninsula Corridor Joint Powers Board and intends to pursue further recovery from a subcontractor. The filing does not state a clear settlement amount or potential further loss. A separate False Claims Act case was remanded to district court; the company could not estimate the probability or range of loss.
- Management said ordinary-course claims, including asbestos-related claims, were not expected to materially affect the company; insurance is expected to reimburse significant asbestos-related costs. Government contract audits may result in cost disallowances, though none had historically been material.
Important facts for investors to verify
- Whether new awards and backlog convert to funded work and revenue, particularly given the $2.6 billion difference between backlog and remaining performance obligations.
- Whether Critical Infrastructure volume and profitability stabilize, and whether joint-venture/project write-downs recur.
- Acquisition performance and integration, including the contribution and costs of BlackHorse, Echo Ridge, and Braxton.
- Cash generation, working capital, and liquidity after acquisition spending, distributions to noncontrolling interests, and the $100 million share-repurchase authorization; $91.3 million remained under the program at quarter-end.
- Developments in the remanded False Claims Act litigation, the JPB settlement and subcontractor recovery, tax audits, and implementation of the vaccination-or-testing requirement.