Parsons Corporation (NYSE: PSN) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Parsons provides engineering, technical, software and infrastructure services through Federal Solutions and Critical Infrastructure. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,134.4m | $956.1m | $3,092.2m | $2,710.1m |
| Operating income | $64.0m | $39.7m | $132.3m | $85.6m |
| Net income attributable to Parsons | $29.6m | $19.4m | $68.5m | $35.1m |
| Diluted EPS | $0.27 | $0.18 | $0.62 | $0.33 |
| Operating margin | 5.6% | 4.2% | 4.3% | 3.2% |
| Adjusted EBITDA | $102.7m | $84.4m | $254.3m | $218.8m |
| Adjusted EBITDA margin | 9.1% | 8.8% | 8.2% | 8.1% |
Revenue increased 18.7% for Q3 and 14.1% year to date. Operating income and Parsons-attributable net income also rose substantially. Adjusted EBITDA is a non-GAAP measure and includes income attributable to noncontrolling interests; it should not be treated as equivalent to Parsons-attributable earnings or cash flow.
- Segments: Q3 Federal Solutions revenue grew 24.3% to $620.4m and segment Adjusted EBITDA attributable to Parsons rose 31.2% to $61.0m. Critical Infrastructure revenue grew 12.5% to $514.0m, while segment Adjusted EBITDA fell 9.3% to $27.5m. Management cited lower joint-venture earnings, growth investments, legacy-program cost adjustments and program completions.
- Cash flow: Nine-month operating cash flow was $148.4m, versus $115.7m. Investing cash use was $402.7m, primarily reflecting the Xator acquisition; capital expenditures were $19.8m. Cash and cash equivalents were $147.5m at quarter-end, down from $342.6m at year-end 2021. This balance includes $62.5m held by consolidated joint ventures, which is restricted to their use.
- Working capital and collections: Working capital was $461.3m versus $601.6m at December 31, 2021. Net DSO remained 68 days. Accounts receivable was $710.7m and contract assets were $642.3m at quarter-end.
- Debt and liquidity: Long-term debt was $694.7m, comprising $101.2m drawn on the revolver, $200m of senior notes and $400m of convertible senior notes, net of issuance costs. Revolver borrowings carried a 4.46% rate at quarter-end, compared with 1.36% at year-end 2021. The company reported compliance with debt covenants and said liquidity was adequate for at least 12 months.
Material changes and business indicators
- Xator was acquired on May 31, 2022 for $388.3m in cash, partly funded by $300m of revolver borrowing. It contributed $70.4m of Q3 revenue and $91.2m for the nine-month period. Preliminary purchase accounting included $253.0m of goodwill and $123.5m of intangible assets.
- Nine-month awards were $3.17bn, down from $3.74bn; book-to-bill was 1.0 versus 1.4. Q3 book-to-bill was 1.1, compared with 1.1 a year earlier.
- Backlog was $8.23bn, down from $8.58bn a year earlier. Remaining unsatisfied performance obligations (RUPO) were $5.8bn. Parsons expects to recognize $3.1bn of funded backlog as revenue over the following 12 months; backlog includes unfunded work, options and other items whose realization is not assured.
- Equity in earnings of unconsolidated joint ventures declined to a loss of $1.0m in Q3 from earnings of $9.6m. A $6.4m Q3 write-down of a Critical Infrastructure joint venture reduced diluted EPS by $0.04; the nine-month write-down was $9.4m and reduced diluted EPS by $0.06.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management cited adequate liquidity and capital resources to support operations, debt service and its acquisition strategy for at least 12 months.
- After quarter-end, Parsons prepaid $200m of private-placement debt on October 26 using revolver borrowings, incurring $2.1m of interest expense and related costs. On October 28 it drew $350m under the delayed-draw term loan and used the proceeds to reduce revolver borrowings.
- Risks discussed include federal budget and appropriation uncertainty, contract cancellations or non-exercise of options, government shutdowns, contract audits and cost disallowances, competitive bidding, and estimates of contract costs and claims. Fixed-price work can expose the company to cost overruns.
- A False Claims Act qui tam lawsuit was remanded to the district court after appellate and Supreme Court proceedings. Parsons said it cannot determine the probability of outcome or a potential loss range. Management believes other litigation and asbestos claims will not materially affect results, but outcomes are not assured. Government contract audits for years after 2013 remain open.
- Management reported effective disclosure controls as of September 30, 2022, and no material change in internal control over financial reporting during the quarter. The filing reported no material change to the risk factors in the 2021 Form 10-K.
Investor verification priorities
- Assess whether awards, book-to-bill and backlog support future growth, noting the decline in year-to-date awards and the unfunded and option-related components of backlog.
- Track post-acquisition debt, interest expense and liquidity after the October refinancing transactions, as well as the cost and integration of Xator.
- Monitor Critical Infrastructure profitability and joint-venture results, including the effects of write-downs and legacy-program cost adjustments.
- Review collection trends, contract-asset growth and the realization of claims and unapproved change orders; contract assets included $102.2m of these items at quarter-end.
- Follow developments in the False Claims Act matter, government contract audits and other contingencies; the filing does not provide a clear potential loss value for the principal lawsuit.