Parsons Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Parsons provides technology-driven services and solutions across Federal Solutions and Critical Infrastructure.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $971.0 million | $904.4 million | Up 7.4% |
| Operating income / margin | $23.7 million / 2.4% | $23.0 million / 2.5% | Income up 2.8%; margin down 0.1 percentage point |
| Net income attributable to Parsons | $13.0 million | $9.7 million | Up 33.1% |
| Diluted EPS | $0.13 | $0.12 | Up $0.01 |
| Adjusted EBITDA (non-GAAP) | $60.5 million / 6.2% margin | $72.0 million / 8.0% margin | Down 16.0%; margin down 1.8 percentage points |
| Cash from operations | $(119.0) million | $(60.1) million | Cash use increased $58.9 million |
Revenue rose in Federal Solutions to $477.6 million (up 13.0%) and Critical Infrastructure to $493.4 million (up 2.5%). Federal Solutions Adjusted EBITDA attributable to Parsons fell 22.1% to $31.6 million, mainly from lower margins on work with higher subcontractor and material costs and higher allocated overhead. Critical Infrastructure Adjusted EBITDA was nearly unchanged at $27.4 million.
Operating cash use reflected working-capital outflows, particularly accounts receivable and contract assets, and payment of long-term employee incentives. Investing cash use was $12.2 million, versus $301.1 million in Q1 2019, which included the OGSystems acquisition. Financing provided $63.7 million, including $131.5 million of borrowings and $66.5 million of repayments.
Financial position and operating indicators
- At March 31, 2020, cash and cash equivalents were $119.3 million; restricted cash and investments were $7.4 million. Cash, cash equivalents and restricted cash totaled $126.7 million, down $68.7 million from year-end.
- Long-term debt was $314.4 million, including $250 million of senior notes and $65 million outstanding on the revolving facility. The facility had $440 million of available capacity, as reported by the company. Debt covenants were in compliance.
- Current assets were $1.602 billion and current liabilities $1.151 billion; working capital was $450.6 million. Net DSO was 64 days, compared with 61 days a year earlier.
- Backlog was $7.801 billion, versus $8.554 billion a year earlier; remaining unsatisfied performance obligations (RUPO) were $5.1 billion. Year-to-date awards were $966.1 million and book-to-bill was 1.0, compared with $1.221 billion and 1.4, respectively.
Material changes, outlook and risks
- Management said COVID-19 had not materially disrupted work or caused substantive cancellations through the filing date. Most employees had moved to remote work. The company reported potential award delays, slight reductions in North American Critical Infrastructure client hours, and expected some payment delays, especially from Middle East government customers. It anticipated no material change to financial condition or results, while emphasizing the pandemic’s uncertain effects.
- Management expected adequate liquidity for at least 12 months and did not expect COVID-19 to impair covenant compliance or access to borrowing capacity. This is management’s assessment, not a formal earnings forecast; the filing provides no numerical revenue or earnings guidance.
- Q1 2020 net income reflects the company’s post-IPO C-corporation tax status. The effective tax rate was 26.13%, versus 12.35% in Q1 2019; the prior-period comparison was affected by the former S-corporation status. Interest expense declined to $4.0 million from $8.3 million.
- Contract assets included $87.8 million of unapproved change orders, claims and requests for equitable adjustment. Management reported no material related losses in the quarter. Federal contract audits may disallow costs, and backlog includes unfunded work, options and orders that may not be realized.
- Material litigation includes a California train-control dispute in which the customer seeks more than $100 million; Parsons disputes the claim and said the outcome and potential loss could not be estimated. The filing also describes a False Claims Act case and a patent infringement suit whose outcomes and potential losses could not be estimated.
- Other risks include government budget and procurement uncertainty, contract execution and margin risk, potential pandemic-related collection delays, and foreign currency exposure. Management reported no goodwill impairment following its COVID-19-related reassessment.
Important facts for investors to verify
- Whether receivable collections, contract assets and DSO improve, particularly given the larger quarterly operating cash outflow and anticipated payment delays.
- Whether awards and book-to-bill recover, and how much reported backlog is funded, executable and converted into revenue.
- Whether Federal Solutions margins improve after the decline in segment Adjusted EBITDA, and how much reported performance depends on non-GAAP adjustments.
- Available revolver capacity, debt covenant headroom and the company’s ability to sustain liquidity if pandemic effects or working-capital demands worsen.
- Developments in the train-control, False Claims Act and patent litigation, as well as government contract audits and claims included in contract assets.