Parsons Corporation — FY2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. Parsons provides technology, engineering and program-management solutions through Federal Solutions and Critical Infrastructure. It completed its IPO in May 2019 and acquired OGSystems and QRC Technologies during the year.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $3,954.8 million | $3,560.5 million | +11.1% |
| Operating income | $92.1 million | $205.0 million | -55.1% |
| Net income attributable to Parsons | $120.5 million | $222.3 million | -45.8% |
| Adjusted EBITDA | $325.0 million | $246.2 million | +32.0% |
| Net cash from operating activities | $220.2 million | $284.6 million | -22.6% |
| Cash, cash equivalents and restricted cash | $195.4 million | $281.2 million | Down $85.8 million |
| Total debt | $249.4 million | $429.2 million | Down $179.8 million |
Operating margin was 2.3% versus 5.8%; Adjusted EBITDA margin was 8.2% versus 6.9%. Net income margin, calculated by the company using income including noncontrolling interests, was 3.5% versus 6.7%. The 2019 results included a $69.9 million income tax benefit, principally from recognizing deferred tax assets when the company converted from S corporation to C corporation status. Accordingly, reported net income and margins reflect a material tax-related benefit.
Revenue by segment: Federal Solutions was $1,887.9 million, up 27.6%; Critical Infrastructure was $2,066.9 million, down 0.7% as reported. Critical Infrastructure revenue rose $44.2 million excluding a $55.1 million favorable claim-related revenue item recorded in 2018. Adjusted EBITDA attributable to Parsons was $169.1 million for Federal Solutions and $138.9 million for Critical Infrastructure.
At year-end, cash and cash equivalents were $182.7 million, including $51.2 million held by consolidated joint ventures; restricted cash and investments were $12.7 million. Working capital was $382.0 million. Debt consisted of $250.0 million of senior notes, net of issuance costs; there were no revolver borrowings outstanding. The filing states liquidity was adequate for operations, debt service and its acquisition strategy for at least the next 12 months.
Material changes and unusual items
- Revenue growth was driven substantially by acquisitions: Federal Solutions gained $317.4 million of acquired revenue, alongside $91.5 million of organic growth. 2019 acquisitions were OGSystems ($292.4 million) and QRC ($214.1 million).
- Indirect general and administrative expense rose 30.8% to $781.4 million. Drivers included acquisitions and related amortization, higher bid and proposal and corporate costs, and cash-settled equity compensation, which increased to $65.7 million from $16.5 million.
- Operating cash flow declined, primarily due to working-capital use, including growth in receivables and contract assets. Net DSO rose to 55 days from 52 days.
- Investing cash outflow was $570.8 million, including $494.8 million for acquisitions and $67.6 million in capital expenditures. IPO proceeds of $536.9 million helped fund a $52.1 million dividend to the ESOP and repayment of acquisition-related debt, including a $150 million term loan.
- The 2018 comparison included a $129.7 million reversal of a liability from a joint-venture litigation matter, recorded partly as revenue and partly as other income. No comparable gain was recorded in 2019.
- Q4 2019 revenue was $1,037.4 million, operating income $24.3 million, net income attributable to Parsons $13.7 million and Adjusted EBITDA $87.8 million. Q4 2018 figures were $928.9 million, $24.1 million, $7.4 million and $54.2 million, respectively; 2018 Q2 included the favorable claim reversal.
Backlog, outlook and risks
Total backlog was $8.03 billion, up 0.8%, comprising $4.14 billion funded and $3.92 billion unfunded. Parsons expected to recognize $2.8 billion of year-end funded backlog as revenue in the next 12 months. Remaining unsatisfied performance obligations were $5.0 billion; backlog also includes probable options and potential task orders. Awards were $4.24 billion versus $4.48 billion in 2018; overall book-to-bill was 1.1, while Critical Infrastructure book-to-bill was 0.8 as some prospective awards shifted to 2020. Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects the effective tax rate to increase relative to S corporation years.
Key risks include dependence on government funding and contracts, termination or nonrenewal rights, contract cost-estimation and claims exposure, competition, security breaches, and difficulty hiring cleared personnel. Government agencies represented 48% of consolidated revenue in 2019. The filing identifies litigation involving a California rail project, a False Claims Act qui tam case and an alleged patent infringement; outcomes and potential loss ranges were not determinable for these matters. Parsons also had $55.0 million of letters of credit and guarantees relating to joint ventures.
Most important facts for investors to verify
- How much of Federal Solutions growth and backlog conversion is sustainable organically, apart from acquisitions, and whether Critical Infrastructure awards recover from its 0.8 book-to-bill.
- Whether cash conversion improves after the 2019 working-capital-driven decline in operating cash flow and increase in net DSO.
- The underlying earnings and tax profile excluding the one-time deferred tax benefit and the prior-year litigation gain; also monitor acquisition-related amortization and cash-settled compensation.
- Funding, timing and profitability of unfunded backlog, options and IDIQ work, and the status of the cited litigation, customer claims and government audits.
- The ESOP owned approximately 78.4% of outstanding shares at year-end, making Parsons a controlled company; the company did not expect to pay cash dividends in the foreseeable future.