Parsons Corporation — Q2 2019 Form 10-Q
Business context and reporting period
Parsons provides technology, engineering and technical services to U.S. federal government and critical-infrastructure customers. It reports Federal Solutions and Critical Infrastructure segments. This filing covers the three and six months ended June 30, 2019; comparatives ended June 29, 2018. Parsons completed its IPO on May 8, 2019, converting from an S corporation to a C corporation.
Financial and operating highlights
| Metric | Three months ended June 30, 2019 | Prior-year comparable | Six months ended June 30, 2019 | Prior-year comparable |
|---|---|---|---|---|
| Revenue | $989.7 million | $900.7 million | $1,894.1 million | $1,655.4 million |
| Operating income (loss) | $(8.7) million | $86.9 million | $14.3 million | $125.8 million |
| Net income attributable to Parsons | $40.3 million | $148.4 million | $50.0 million | $173.7 million |
| Basic and diluted EPS | $0.44 | $1.83 | $0.59 | $2.13 |
| Adjusted EBITDA | $76.2 million | $52.6 million | $148.2 million | $103.5 million |
| Adjusted EBITDA margin | 7.7% | 5.8% | 7.8% | 6.3% |
- Revenue increased 9.9% in Q2 and 14.4% in the first half. Federal Solutions grew 40.3% in Q2, largely reflecting acquisitions; Critical Infrastructure revenue declined 8.7% as reported, but increased $6.7 million excluding a $55.1 million prior-year claim settlement.
- Q2 results compare with a prior-year period containing a $132.0 million litigation-related gain, including $55.1 million recorded as revenue and $76.9 million as other income. This materially affects year-over-year GAAP income comparisons.
- Q2 2019 included a $53.5 million income-tax benefit, principally from the S-to-C corporation conversion, including an estimated $56 million deferred-tax benefit. Management said the estimate is subject to revision. Cash-settled equity compensation expense also rose to $43.3 million in Q2, versus $5.0 million a year earlier, reflecting the change in the measured share value.
- Cash used in operating activities was $48.5 million for the first half, versus $8.4 million used in the prior-year period. Cash used in investing was $312.2 million, mainly for acquisitions; financing provided $291.5 million, including $537.3 million of net IPO proceeds and debt repayments. Period-end cash, cash equivalents and restricted cash totaled $211.4 million.
- At June 30, cash and cash equivalents were $202.9 million; restricted cash and investments were $8.5 million. Working capital was $486.2 million. Net DSO improved to 65 days from 70 days a year earlier.
- Long-term debt was $249.3 million, comprising $250 million of senior notes net of issuance costs; there were no revolving-credit borrowings at quarter-end. The $150 million term loan and revolving borrowings were repaid using IPO proceeds. The revolving facility is $550 million; outstanding letters of credit reduce availability. Parsons reported compliance with debt covenants.
Material changes, outlook, risks and unusual items
- Federal Solutions first-half revenue rose to $901.3 million from $632.4 million, primarily due to acquisitions including OGSystems, acquired in January 2019. Critical Infrastructure first-half revenue was $992.8 million versus $1,023.0 million, including the prior-year claim settlement.
- First-half awards were $2.20 billion, backlog was $8.50 billion, and book-to-bill was 1.2. Remaining unsatisfied performance obligations were $5.4 billion; the filing says the difference from backlog includes probable options, unissued delivery orders and certain probable awards. Management expected $2.3 billion of funded backlog to convert to revenue over the following 12 months.
- Management stated it believed liquidity and capital resources were adequate for operations, debt service and its acquisition strategy over the next 12 months. No specific revenue or earnings guidance was provided. Management expects operating expenses to increase with growth and public-company costs, while generally declining as a share of revenue as scale benefits accrue.
- On July 31, 2019, Parsons closed its acquisition of QRC Technologies for an estimated $217.7 million, expected to be funded with $140.0 million of revolving debt and $77.7 million of cash.
- Operating lease adoption added $212.4 million of right-of-use assets and $230.3 million of operating lease liabilities at June 30. A $52.6 million cumulative-effect adjustment to retained earnings reflected recognition of the previously deferred sale-leaseback gain.
- ESOP shares are presented as temporary, redeemable equity at $2.88 billion. The redemption-value accretion contributed to a reported shareholders’ deficit of $1.34 billion; it is not simply a measure of operating performance.
- Risks include federal budget and appropriation uncertainty, contract cancellations or non-renewal, contract cost and revenue estimates, government audits, and acquisition integration. The JPB litigation seeks more than $100 million; Parsons disputes the claim and said the outcome and any loss range could not yet be determined. A False Claims Act matter was remanded to district court, with outcome and potential loss also undetermined. Management did not expect ordinary-course claims, asbestos claims or audits to materially affect results, but cannot assure favorable outcomes.
Important facts for investors to verify
- How much of revenue and adjusted EBITDA growth reflects acquired businesses versus legacy operations, and how acquisition costs and amortization affect ongoing margins.
- The sustainability and cash conversion of earnings, given first-half operating cash outflow and increases in receivables and contract assets.
- Whether backlog, unfunded awards and RUPO convert to funded work and revenue as expected, particularly amid federal budget and contract-option uncertainty.
- The final tax impact of the S-to-C conversion and whether the estimated deferred-tax benefit changes.
- QRC’s final purchase accounting and financing, available revolver capacity after letters of credit, and exposure from the JPB and False Claims Act litigation.