Parsons Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Parsons provides technology, engineering, and related services in defense, intelligence, and critical infrastructure markets through its Federal Solutions and Critical Infrastructure segments. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $979.5 million | $989.7 million | $1,950.5 million | $1,894.1 million |
| Operating income (loss) | $46.3 million | ($8.7 million) | $70.0 million | $14.3 million |
| Net income attributable to Parsons | $23.3 million | $40.3 million | $36.3 million | $50.0 million |
| Diluted EPS | $0.23 | $0.44 | $0.36 | $0.59 |
| Adjusted EBITDA | $91.2 million | $76.2 million | $151.7 million | $148.2 million |
| Adjusted EBITDA margin | 9.3% | 7.7% | 7.8% | 7.8% |
- Q2 revenue declined 1.0%; first-half revenue increased 3.0%. Federal Solutions revenue rose 0.8% in Q2 and 6.5% year to date; Critical Infrastructure revenue declined 2.7% and 0.2%, respectively.
- Q2 operating income improved from a loss to a profit, while net income attributable to Parsons declined. The year-over-year net income comparison is affected by a $56 million deferred-tax benefit recorded in Q2 2019 upon conversion from S corporation to C corporation status.
- Federal Solutions Q2 Adjusted EBITDA attributable to Parsons increased 33.6% to $47.7 million; Critical Infrastructure declined 12.4% to $35.5 million. For the first half, those measures were $79.3 million, up 4.0%, and $62.9 million, down 7.8%, respectively.
Cash flow, balance sheet, and liquidity
- For the six months, operating cash flow was negative $31.4 million, versus negative $48.5 million in 2019. Investing cash flow was negative $25.8 million, compared with negative $312.2 million, largely because 2019 included the OGSystems acquisition. Financing cash flow was negative $0.8 million, versus positive $291.5 million in 2019, which included IPO proceeds.
- Cash and cash equivalents were $129.6 million at June 30, 2020; cash, cash equivalents, and restricted cash totaled $136.6 million. Working capital was $458.2 million. Net days sales outstanding increased to 69 days from 65 days a year earlier; management cited customer administrative payment delays.
- Long-term debt was $249.4 million, representing $250 million of senior notes net of issuance costs. There were no revolver borrowings. The company reported $505.1 million of available borrowing capacity and $231.4 million of total outstanding letters of credit. It reported compliance with debt covenants.
- Accounts receivable, net, was $717.4 million; contract assets were $645.6 million and contract liabilities were $219.0 million. Contract assets included $103.7 million related to unapproved change orders, claims, and requests for equitable adjustment.
Material changes, outlook, and risks
- Q2 direct contract costs and indirect, general, and administrative expenses fell year over year. Adjusted EBITDA improved, while equity earnings from unconsolidated joint ventures declined to $3.8 million from $11.6 million, reflecting lower margins and reduced activity on a substantially completed venture.
- Six-month awards were $2.0 billion, down from $2.2 billion; backlog was $7.7 billion versus $8.5 billion a year earlier, and year-to-date book-to-bill was 1.0 versus 1.2. Management attributed award timing partly to two significant Federal Solutions awards in Q1 2019 and potential Critical Infrastructure awards pushed to later dates. Remaining unsatisfied performance obligations were $5.0 billion; management expected $2.8 billion of funded backlog to be recognized within twelve months.
- COVID-19 led to customer site-access restrictions, some delayed work and prospective awards, and extended Federal Solutions contracts. Parsons reported no material work disruption or substantive cancellations to date, but said the pandemic’s ultimate impact was difficult to predict. Management anticipated no material change to financial condition or results, and said it believed liquidity was adequate for at least twelve months; this is not a quantified earnings forecast.
- Material risks include uncertain government budgets, contract funding and options, customer collection timing, COVID-19 impacts, and government contract audits. The filing reports a California rail-project lawsuit seeking more than $100 million; Parsons disputes the claim and cannot estimate the likelihood or potential loss. It also describes False Claims Act and patent litigation for which outcomes and potential losses could not be estimated.
- Other notable items: first-half results include a $9.0 million favorable revenue adjustment for prior-period contract estimate revisions. The company deferred $18.5 million of tax payments until July 15, 2020 and $14.5 million of employer Social Security taxes under the CARES Act.
Important facts for investors to verify
- Whether delayed customer payments, rising DSO, and contract-asset growth affect collections and operating cash flow.
- How much of backlog and the $5.0 billion of remaining performance obligations is funded, and whether delayed awards convert to contracts.
- Whether COVID-19 site restrictions, delayed work, or award timing materially change segment performance or management’s liquidity assessment.
- Potential outcomes of the rail-project, False Claims Act, and patent litigation, including insurance coverage and any resulting liabilities.
- Debt repayment and refinancing plans, particularly the $50 million senior-note tranche due July 2021, and continued covenant compliance.