Parsons Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Parsons provides technology, engineering and technical services to U.S. federal government and critical-infrastructure customers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,418.6 | $1,134.4 | $3,948.5 | $3,092.2 |
| Operating income | $83.3 | $64.0 | $210.9 | $132.3 |
| Net income attributable to Parsons | $47.4 | $29.6 | $116.2 | $68.5 |
| Diluted EPS | $0.42 | $0.27 | $1.03 | $0.62 |
| Adjusted EBITDA, non-GAAP | $127.8 | $102.7 | $336.5 | $254.3 |
- Q3 revenue rose 25.1%; operating margin increased to 5.9% from 5.6%. Nine-month revenue rose 27.7%; operating margin increased to 5.3% from 4.3%.
- Q3 Adjusted EBITDA margin was 9.0%, versus 9.1%; nine-month margin was 8.5%, versus 8.2%. Adjusted EBITDA is a non-GAAP measure.
- Q3 revenue growth came from Federal Solutions (+25.7%) and Critical Infrastructure (+24.2%). Critical Infrastructure Adjusted EBITDA rose 82.2% in the quarter, while Federal Solutions Adjusted EBITDA rose 6.6%; the latter’s margin declined to 8.3% from 9.8%.
- For nine months, Federal Solutions revenue rose 32.0% and segment Adjusted EBITDA rose 36.7%; Critical Infrastructure revenue rose 22.8% and segment Adjusted EBITDA rose 17.8%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $217.6 million, up from $148.4 million. Investing cash outflow was $327.2 million, mainly reflecting acquisitions, joint-venture investments and capital expenditures. Financing provided $52.4 million. Cash and cash equivalents declined $57.1 million from year-end to $205.4 million.
- At September 30, working capital was $621.4 million. Current assets were $2,015.5 million and current liabilities $1,394.1 million. Net DSO improved to 65 days from 68 days a year earlier.
- Reported long-term debt, net of issuance costs, was $820.4 million, versus $743.6 million at year-end; principal outstanding comprised a $350 million term loan, $400 million convertible notes and $75 million revolver borrowings. Cash was $205.4 million. Term-loan and revolver rates were 6.6% and 6.7%, respectively.
- Management said liquidity and capital resources were adequate for operations, debt service and the acquisition strategy for at least the next 12 months. The company reported compliance with credit-facility covenants.
Material changes and business developments
- Year-to-date awards increased to $4.75 billion from $3.17 billion; book-to-bill was 1.2 versus 1.0. Backlog was $8.82 billion versus $8.23 billion a year earlier. Remaining unsatisfied performance obligations were $6.2 billion; Parsons expects to recognize $3.5 billion of funded backlog within 12 months.
- Parsons acquired SealingTech for $181.7 million in cash, with up to $25 million additional contingent consideration, and acquired IPKeys for $43 million. The acquisitions expanded cyber, defense, grid-modernization and critical-infrastructure capabilities. SealingTech contributed $18.4 million of Q3 revenue; IPKeys contributed $3.5 million in Q3 revenue.
- Q3 interest expense increased to $8.6 million from $6.3 million, primarily due to higher borrowing rates and revolver borrowings. Nine-month interest expense increased to $22.4 million from $14.8 million.
- Contract assets rose 19.3% from year-end to $756.6 million; contract liabilities rose 30.1% to $277.2 million. Accounts receivable increased to $906.7 million from $717.3 million.
Outlook, commentary and risks
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management cited continued growth strategies, contract awards and backlog, while noting that awards, funding and revenue can vary with timing and customer decisions.
- Management attributed growth to organic volume in both segments and acquisitions. Federal Solutions benefited from $20 million in incentive fees recognized in Q2; Critical Infrastructure’s Q3 results benefited from higher-margin joint-venture change orders. Segment margins also faced incentive-compensation costs and, in the year-to-date period, project and joint-venture write-downs.
- A contract estimate change and related revenue estimate changes reduced nine-month operating income by $3.1 million, net income by $2.3 million and diluted EPS by $0.02. Separate joint-venture adjustments decreased nine-month operating income by $12.4 million, net income by $9.2 million and diluted EPS by $0.08.
- Key risks include federal budget and appropriation delays, contract cancellations or option non-renewals, government audits and potential cost disallowances, fixed-price contract cost overruns, and international political and currency risks. International revenue was 24.6% of Q3 revenue; the filing specifically notes the potential regional impact of ongoing war and unrest in Israel and the Middle East.
- A long-running False Claims Act qui tam case remains pending; the court had not ruled on motions, and trial could be scheduled in 2023 or 2024. Parsons said it did not believe ordinary-course claims, including asbestos matters, would materially affect results, while noting outcomes cannot be assured.
- Subsequent to quarter-end, Parsons agreed to acquire I.S. Engineers for $11.5 million, subject to adjustments; the company described the acquisition as not material.
Important facts for investors to verify
- Whether award growth and the $8.82 billion backlog convert into funded work and revenue as expected, including the $3.5 billion of funded backlog expected within 12 months.
- Whether working-capital growth, especially accounts receivable and contract assets, converts into cash; operating cash flow benefited from earnings but was also affected by timing of working-capital movements.
- Debt-service and interest-rate exposure, including variable-rate borrowings, the $400 million convertible notes due in 2025, and remaining revolver capacity.
- Performance and integration of SealingTech and IPKeys, including SealingTech’s contingent earn-out and preliminary purchase-price allocations.
- Potential effects of the pending False Claims Act case, government contract audits, and the disclosed project and joint-venture write-downs.