Parsons Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Parsons provides technology-driven solutions to defense, intelligence, and critical infrastructure customers through its Federal Solutions and Critical Infrastructure segments. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $874.7m | $971.0m; down 9.9% |
| Operating income / margin | $25.6m / 2.9% | $23.7m / 2.4% |
| Net income attributable to Parsons | $9.0m; diluted EPS $0.09 | $13.0m; diluted EPS $0.13 |
| Adjusted EBITDA / margin | $68.7m / 7.9% | $60.5m / 6.2% |
| Cash from operating activities | $(66.0)m | $(119.0)m |
| Cash, cash equivalents and restricted cash | $399.4m | $487.2m at Dec. 31, 2020 |
| Total debt | $640.3m | $590.0m at Dec. 31, 2020 |
| Working capital | $691.5m | $655.7m at Dec. 31, 2020 |
Revenue fell in both segments, led by Critical Infrastructure, while operating income and Adjusted EBITDA rose. Parsons-attributable net income declined, in part alongside higher noncontrolling-interest income. Adjusted EBITDA is a non-GAAP measure and excludes specified items; it is not a substitute for cash flow or GAAP earnings.
Segments, awards and backlog
- Federal Solutions: Revenue was $452.1m, down 5.3%; segment Adjusted EBITDA attributable to Parsons was $32.0m, up 1.2%.
- Critical Infrastructure: Revenue was $422.6m, down 14.3%; segment Adjusted EBITDA attributable to Parsons was $31.7m, up 15.7%.
- Year-to-date awards were $1.01bn versus $966.1m; overall book-to-bill was 1.2 versus 1.0. Segment book-to-bill was 0.9 for Federal Solutions and 1.4 for Critical Infrastructure.
- Backlog was $8.17bn, up from $7.80bn a year earlier. Remaining unsatisfied performance obligations were $5.1bn. Parsons expected to recognize $2.7bn of funded backlog within the following 12 months.
Cash flow, debt and liquidity
Operating cash use improved by $53.0m year over year, but remained negative. The company attributed the improvement to higher adjusted net income, changes in other long-term liabilities, and lower working-capital cash outflows. Investing cash use was $11.0m; financing cash use was $11.2m. Net DSO rose to 71 days from 64 days a year earlier.
Debt comprised $50.0m of short-term senior notes, $200.0m of long-term senior notes, and $400.0m of convertible senior notes, net of issuance costs. The $400.0m convertible notes carry 0.25% interest and mature in 2025. The $50.0m senior-note tranche is due July 2021. There were no revolving-credit borrowings at quarter-end; the facility limit is $550m, with $45.3m of letters of credit outstanding under it. Additional bank-line letters of credit were $203.9m. Parsons reported compliance with debt covenants and said it had adequate liquidity for at least the next 12 months.
Management commentary, risks and unusual items
- Management reported that remote-work measures had not materially disrupted performance, but customer site-access restrictions reduced work volume and some potential awards were delayed. No substantive cancellations of awarded contracts were reported. The ultimate COVID-19 impact remained uncertain.
- Management cited lower business volume as the main cause of revenue declines. Critical Infrastructure’s EBITDA improvement reflected lower SG&A, better contract profitability and higher equity earnings from unconsolidated joint ventures.
- The company early adopted ASU 2020-06, reclassifying the convertible notes’ equity component into debt and changing the reported carrying value. Accordingly, the debt increase should be read in light of this accounting change, not assumed to reflect new borrowing.
- Contract assets included $117.8m for unapproved change orders, claims and requests for equitable adjustment. Management reported no material losses related to their collectability during the quarter.
- Significant unresolved matters include a Peninsula Corridor Joint Powers Board claim seeking more than $100m, a False Claims Act case on remand, and a patent-infringement suit. The company could not determine the probability or potential loss range for these matters. It also noted ongoing government contract audits; years after 2010 remain open.
- COVID-19, federal budget uncertainty, government spending priorities, contract funding and the timing of awards remain risks. Management reported no material change to risk factors other than its COVID-19 disclosure. No forward-looking financial guidance was provided in the filing.
Investor verification priorities
- Track whether revenue stabilizes and whether Critical Infrastructure’s stronger margins persist despite lower sales.
- Monitor operating cash conversion, receivables, contract assets, net DSO and collections; cash flow remained negative and DSO increased.
- Assess the quality and funding of backlog: backlog includes unfunded work, options and anticipated task orders, and may not convert fully to revenue.
- Review the July 2021 $50m debt maturity, convertible-note dilution and settlement terms, and available revolver capacity after letters of credit.
- Follow the large litigation matters, contract claims and government audits for changes in estimated exposure or insurance recovery.