Parsons Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022, unless otherwise noted. Amounts are in U.S. dollars.
Business context
Parsons provides engineering, technical, software, and infrastructure services through its Federal Solutions and Critical Infrastructure segments. Federal Solutions serves U.S. government customers; Critical Infrastructure serves government and commercial infrastructure customers. Results include Xator, acquired in May 2022.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,173.5 million | $949.1 million | +23.6% |
| Operating income | $51.1 million | $35.7 million | +43.3% |
| Operating margin | 4.4% | 3.8% | +0.6 percentage points |
| Net income attributable to Parsons | $25.6 million | $20.7 million | +23.6% |
| Diluted EPS | $0.23 | $0.19 | +$0.04 |
| Adjusted EBITDA | $90.4 million | $74.2 million | +21.7% |
| Adjusted EBITDA margin | 7.7% | 7.8% | -0.1 percentage points |
| Net cash used in operating activities | $9.0 million | $25.7 million | $16.7 million improvement |
Federal Solutions revenue rose 29.1% to $634.5 million, including $112.4 million from Xator. Critical Infrastructure revenue rose 17.8% to $538.9 million. Parsons-attributable segment Adjusted EBITDA increased 31.7% in Federal Solutions to $56.1 million, but declined 14.0% in Critical Infrastructure to $24.4 million.
Operating cash flow remained negative, mainly reflecting working-capital use, including higher receivables, contract assets, and prepaid and other assets. Investing cash outflow was $20.8 million, including $8.1 million of capital expenditures and $13.0 million invested in unconsolidated joint ventures. Financing cash outflow was $12.5 million. Cash, cash equivalents, and restricted cash ended the quarter at $220.4 million, down $42.1 million from year-end.
Liquidity, debt, and operating indicators
- Working capital was $661.3 million, versus $611.7 million at December 31, 2022; current assets were $1.80 billion and current liabilities were $1.14 billion.
- Long-term debt carrying value was $744.1 million, comprising a $350 million delayed-draw term loan and $400 million of convertible notes, net of debt issuance costs. The term loan bore a 6.1% rate at quarter-end; the notes bear 0.25% and mature in 2025.
- No borrowings were outstanding on the $650 million revolving credit facility; $43.9 million of letters of credit reduced its availability. A further $224.3 million of letters of credit was outstanding under secondary bank lines. The company reported compliance with credit agreement covenants.
- Net days sales outstanding was 69 days, compared with 76 days a year earlier.
- Backlog was $8.37 billion, up from $8.22 billion a year earlier; year-to-date awards were $1.38 billion and book-to-bill was 1.2, versus 1.0. Remaining unsatisfied performance obligations were $6.1 billion.
Material changes and management commentary
Revenue growth reflected higher volume in both segments, including acquired Xator revenue and new and existing contract activity. Management attributed the overall increase in Adjusted EBITDA primarily to Federal Solutions. Critical Infrastructure profitability was pressured by lower equity earnings from unconsolidated joint ventures, lower-margin change orders that delayed expected profits, certain joint venture write-offs, and higher SG&A. A $6.8 million adjustment at one Critical Infrastructure joint venture reduced operating and net income by $6.8 million and $5.1 million, respectively, and diluted EPS by $0.04.
Management stated that available cash, operating cash generation, and borrowing capacity were adequate to fund operations, debt service, and the ongoing acquisition strategy for at least the next 12 months. The filing provides no specific full-year earnings or revenue guidance. Management expects to recognize $3.4 billion of funded backlog as revenue in the following 12 months, while noting that government customers can cancel contracts or not exercise options.
Outlook, risks, and unusual items
- Federal budget uncertainty, delayed appropriations, spending reductions, and government disruptions could delay or reduce contract funding and demand. Backlog includes unfunded work, probable options, and task orders that may not be issued; backlog is not assured revenue.
- Contract performance depends on estimates of cost to complete and transaction price. Fixed-price contracts carry cost-overrun risk; government cost audits may disallow costs, although the company reported no material historical disallowances.
- Contract assets included $130.2 million related to unapproved change orders, claims, and requests for equitable adjustment. The filing reported no material losses or significant impairment of contract assets in the quarter.
- Unconsolidated joint ventures reported a $10.2 million aggregate net loss, compared with net income of $11.3 million a year earlier; Parsons recorded $5.8 million of equity-method losses.
- A former employee’s False Claims Act qui tam action remains pending; the government did not intervene. The company anticipated dispositive or pre-trial motions in early or mid-2023 and potentially a trial during 2023. Management believes ordinary-course claims, including asbestos matters, will not materially affect results, while acknowledging no assurance of favorable outcomes.
- On April 13, 2023, Parsons agreed to acquire IPKeys Power Partners for $43.2 million in cash, expanding its grid modernization and utility cyber-resiliency capabilities. The acquisition had not closed when the filing was prepared.
- The company reported no material change in risk factors from its 2022 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much of backlog converts to funded, executable work, and whether the $3.4 billion expected within 12 months is affected by appropriations, options, or task-order timing.
- Whether the joint venture margin delays and write-offs are contained, and when delayed profits might be recognized.
- Cash conversion and working-capital trends, given negative quarterly operating cash flow and growth in receivables and contract assets.
- Floating-rate debt costs, revolving-facility availability after letters of credit, and potential dilution from the 2025 convertible notes.
- Progress and purchase accounting for the IPKeys acquisition, and developments in the False Claims Act case, government audits, and unapproved contract claims.