Parsons Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Parsons provides engineering, technical and software services through Federal Solutions and Critical Infrastructure. Financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $949.1 million | $874.7 million; up 8.5% |
| Operating income | $35.7 million; 3.8% margin | $25.6 million; 2.9% margin |
| Net income attributable to Parsons | $20.7 million; diluted EPS $0.19 | $9.0 million; diluted EPS $0.09 |
| Adjusted EBITDA | $74.2 million; 7.8% margin | $68.7 million; 7.9% margin |
| Operating cash flow | $(25.7) million | $(66.0) million |
| Cash, cash equivalents and restricted cash | $286.8 million at March 31 | $343.9 million at December 31, 2021 |
| Debt | $592.5 million | $591.9 million at December 31, 2021 |
Revenue rose in both segments: Federal Solutions increased 8.8% to $491.6 million, and Critical Infrastructure increased 8.2% to $457.4 million. Segment Adjusted EBITDA attributable to Parsons increased 33.3% to $42.6 million in Federal Solutions, but declined 10.6% to $28.3 million in Critical Infrastructure. Management cited acquisition and contract-award volume for Federal Solutions growth; Critical Infrastructure profitability was affected by delayed joint-venture profits and higher SG&A.
Net income growth reflected higher operating income and lower total other expense. Adjusted EBITDA increased, while its margin edged down from 7.9% to 7.8%. Adjusted EBITDA is a non-GAAP measure and excludes items including stock-based compensation, transaction-related costs, restructuring and other items.
Liquidity, cash flow and debt
Operating cash outflow improved by $40.3 million year over year. Management attributed the improvement principally to the absence of $26.4 million in long-term incentive plan payments made in Q1 2021 and a smaller working-capital outflow. Q1 2022 cash use included increases in receivables and contract assets, partly offset by other working-capital movements. Net DSO was 76 days, versus 71 days a year earlier; management attributed the increase primarily to lower accounts payable.
Cash, cash equivalents and restricted cash decreased $57.1 million during the quarter. Parsons reported $285.6 million of cash and cash equivalents on its balance sheet, including $28.5 million held by consolidated joint ventures; restricted cash and investments were $1.1 million. The company had $592.5 million of long-term debt, comprising $200 million of senior notes and $400 million of 0.25% convertible notes due 2025, net of debt issuance costs. There were no revolver borrowings under the $650 million facility; $44.5 million of letters of credit reduced available capacity. Additional letters of credit under secondary bank lines totaled $220.6 million.
Management stated that liquidity and capital resources were adequate for operations, debt service and its acquisition strategy for at least the next 12 months. The company reported compliance with debt covenants and no material off-balance-sheet arrangements. Working capital was $632.1 million at March 31, 2022.
Orders, outlook and management commentary
Q1 awards were $917.2 million, down from $1.011 billion; book-to-bill was 1.0 versus 1.2. Federal Solutions awards increased, which management linked to two large awards, while Critical Infrastructure awards were lower following several large awards in the prior-year quarter. Backlog was $8.225 billion, compared with $8.170 billion a year earlier. Remaining unsatisfied performance obligations were $5.5 billion; the company expects to recognize $2.8 billion of funded backlog as revenue within 12 months.
The filing does not provide numerical full-year earnings or revenue guidance. Management notes that backlog conversion depends in part on future funding, task orders and option exercises; government customers may terminate contracts for convenience or decline options. The filing also identifies exposure to federal budget delays or reductions, government-contract audits and regulation, competition, contract-award timing and seasonality.
Acquisitions completed in 2021 contributed to year-over-year Federal Solutions growth. BlackHorse generated $18.4 million of Q1 2022 revenue and Echo Ridge $1.6 million. Intangible-asset amortization was $20.1 million, down from $24.5 million in Q1 2021.
Risks, contingencies and other notable items
- Contract assets included $102.8 million for unapproved change orders, claims and requests for equitable adjustment. Management reported no material losses or significant impairment related to these items in the quarter.
- A False Claims Act qui tam case was remanded to federal district court after appellate and Supreme Court proceedings. Parsons said it could not determine the probability of outcome or a potential loss range.
- The company faces ordinary-course claims, including asbestos-related personal-injury suits; management believes significant costs will be covered by insurance and does not expect material adverse effects. Government audits of costs incurred after 2013 remain open; management reported no historically material disallowed costs.
- Uncertain tax-position liabilities were $22.5 million. Management said audit outcomes could differ from recorded reserves; a decrease of approximately $0.5 million within 12 months was considered reasonably possible.
- The company repurchased 151,436 shares for $5.5 million in Q1 at an average $36.64 per share; $72.8 million remained under its $100 million authorization.
- The board authorized an ESOP amendment providing for lump-sum distributions to participants, executed April 28, 2022. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether awards and book-to-bill sustain backlog growth, and how much reported backlog converts to funded work and revenue.
- Whether receivables, contract assets and DSO improve, given the quarter’s working-capital cash use and claims/change-order balances.
- Whether Critical Infrastructure margins recover as joint-venture profits are realized and SG&A and hiring costs develop.
- Progress and potential exposure in the False Claims Act litigation, open government audits, and uncertain tax matters.
- Cash generation and capital allocation, including debt service, revolver availability, share repurchases and ESOP distributions.