Parsons Corporation (NYSE: PSN) — Q3 2019 Form 10-Q
Business context and reporting period. Parsons provides technology-driven services and solutions to U.S. federal and critical-infrastructure customers through its Federal Solutions and Critical Infrastructure segments. This unaudited filing covers the three and nine months ended September 30, 2019; comparatives ended September 28, 2018. Parsons completed its IPO on May 8, 2019 and changed from S-corporation to C-corporation tax status.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,023.3 million | $976.2 million | $2,917.4 million | $2,631.6 million |
| Operating income | $53.4 million | $55.1 million | $67.8 million | $180.9 million |
| Net income attributable to Parsons | $56.8 million | $41.2 million | $106.8 million | $214.9 million |
| Adjusted EBITDA | $89.0 million | $88.6 million | $237.2 million | $192.0 million |
| Adjusted EBITDA margin | 8.7% | 9.1% | 8.1% | 7.3% |
| Net cash from operating activities | — | — | $130.6 million | $99.8 million |
Revenue and segments. Q3 revenue rose 4.8%; Federal Solutions increased 9.6% to $486.2 million, while Critical Infrastructure increased 0.9% to $537.1 million. Nine-month revenue rose 10.9%, including acquisition contributions; Federal Solutions revenue grew 28.9% and Critical Infrastructure declined 1.6% as reported. Excluding the $55.1 million prior-year claim settlement, Critical Infrastructure nine-month revenue increased $29.6 million.
Margins and earnings. Q3 operating margin was 5.2% versus 5.6%; nine-month operating margin was 2.3% versus 6.9%. Q3 Parsons-attributable net income increased, with a $15.5 million income-tax benefit contributing. Nine-month net income fell from the prior period, which included a $129.7 million litigation-related gain; 2019 also had materially higher acquisition amortization and expenses. Nine-month Adjusted EBITDA increased 23.5%, while Q3 was nearly flat.
Cash, liquidity and debt. Nine-month investing cash outflow was $541.7 million, primarily reflecting $495.7 million of acquisition payments and $44.0 million of capital expenditures. Financing cash inflow was $277.3 million, including $536.9 million of IPO proceeds, partly offset by debt repayments and a $52.1 million dividend. Cash, cash equivalents and restricted cash declined $134.7 million to $146.5 million. Working capital was $318.0 million; management stated liquidity was adequate for at least the next 12 months. Long-term debt was $249.3 million, comprising $250 million of senior notes net of issuance costs; no revolver borrowings were outstanding. The $550 million revolving facility had $45.2 million of letters of credit outstanding under it. Parsons reported compliance with debt covenants.
Orders and visibility. Nine-month awards were $3.33 billion, backlog was $8.25 billion and year-to-date book-to-bill was 1.1x; management cited 1.2x trailing-twelve-month book-to-bill. Remaining unsatisfied performance obligations were $5.1 billion, of which $2.8 billion was expected to be recognized within one year. Backlog includes unfunded work and probable options or delivery orders and is not assured revenue.
Material changes and unusual items
- Acquisitions of OGSystems in January ($292.4 million) and QRC Technologies in July ($214.1 million) expanded Federal Solutions; both were funded partly with borrowings. Acquired businesses contributed to reported growth and increased goodwill and intangible assets.
- Federal Solutions nine-month Adjusted EBITDA rose 25.3%, while Critical Infrastructure rose 27.3%; in Q3, Critical Infrastructure Adjusted EBITDA declined 10.6%, partly due to substantial completion of a significant joint venture and higher indirect costs.
- Parsons recognized a $67.1 million income-tax benefit for the first nine months, largely related to conversion to C-corporation status and deferred-tax remeasurement. The estimated tax benefit from the conversion was updated to $85 million and remained subject to revision. The tax-status change is expected to increase the ongoing effective tax rate compared with S-corporation periods.
- Operating lease adoption added $219.2 million of right-of-use assets and $237.6 million of lease liabilities at September 30, 2019. This materially affected the balance sheet but not reported income statements.
- ESOP shares were presented as $2.58 billion of redeemable temporary equity during the IPO lock-up period. The lock-up expired November 3, 2019; a subsequent October repurchase of approximately 157,100 shares cost about $5.4 million.
Outlook, commentary and risks
No specific revenue or earnings guidance is provided in the supplied filing text. Management cited government spending and budget uncertainty, contract-award timing, government shutdowns, audit and compliance requirements, competition, and seasonality as factors that may affect results. Fixed-price contracts carry cost-overrun risk, while cost-plus and time-and-materials contracts have different margin and reimbursement profiles. Management also noted plans for expenses to rise with growth and public-company costs, while expecting these costs to decline as a percentage of revenue over time through scale.
Parsons disclosed litigation involving a California rail project in which the customer seeks more than $100 million; the company disputes the claim and could not determine the probability or range of loss. A separate False Claims Act matter was remanded to district court after Supreme Court review; the company likewise could not estimate the outcome or potential loss. The filing also identifies government contract audits and potential cost disallowances. Management stated that ordinary-course claims and assessments were not expected to materially affect the company, but outcomes are uncertain.
Most important facts for investors to verify
- How much of revenue and backlog growth reflects acquired businesses versus organic growth, and whether acquisition integration delivers expected returns.
- Whether Federal Solutions award strength offsets Critical Infrastructure’s weaker book-to-bill, including its Q3 ratio of 0.5x.
- The sustainability of margins and earnings after excluding the conversion-related tax benefit, acquisition costs, and other adjustments in Adjusted EBITDA.
- Cash conversion and working-capital trends, particularly rising contract assets and unbilled receivables; contract assets included $58.9 million of unapproved change orders, claims and requests for equitable adjustment.
- Updates on the rail-project litigation, False Claims Act matter, government audits, ESOP distributions and the final tax-benefit estimate.