PARSONS CORP annual report, FY2022

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Parsons Corporation (NYSE: PSN) — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Parsons provides technology, engineering and program-management services through Federal Solutions and Critical Infrastructure.

Financial and operating performance

  • Revenue: $4.195 billion, up 14.6% from $3.661 billion in 2021.
  • Profit: Operating income was $185.7 million (4.4% of revenue), versus $132.4 million (3.6%) in 2021. Net income attributable to Parsons was $96.7 million, versus $64.1 million; diluted EPS was $0.87, versus $0.59.
  • Adjusted EBITDA: $352.8 million, up from $309.7 million. Adjusted EBITDA margin was 8.4%, compared with 8.5%. This is a non-GAAP measure.
  • Cash flow and liquidity: Operating cash flow was $237.5 million, up from $205.6 million. Investing cash outflow was $417.5 million, including $379.5 million net cash used for Xator. Financing cash flow was $100.4 million. Cash and cash equivalents ended at $262.5 million, down from $342.6 million; cash, cash equivalents and restricted cash were $262.5 million, down from $343.9 million. Working capital was $611.7 million. Net DSO increased to 69 days from 68.
  • Debt: Long-term debt was $743.6 million, compared with $591.9 million. It included $400 million of 0.25% convertible notes due 2025 and a $350 million delayed-draw term loan; the $200 million private-placement notes were repaid in October 2022. The term loan’s year-end rate was 5.7%. No revolver borrowings were outstanding at year-end.
  • Backlog: $8.18 billion, down 2.0% year over year; $4.5 billion was funded and $3.6 billion unfunded. Parsons expected to recognize $3.1 billion of funded backlog as revenue in the following 12 months. Remaining unsatisfied performance obligations were $5.7 billion.

Material changes versus 2021

  • Federal Solutions revenue rose 17.2% to $2.213 billion; segment Adjusted EBITDA attributable to Parsons rose 22.3% to $199.0 million.
  • Critical Infrastructure revenue rose 11.8% to $1.982 billion, while segment Adjusted EBITDA increased 1.4% to $123.4 million. Lower equity earnings from unconsolidated joint ventures and higher SG&A restrained segment earnings.
  • The June 2022 Xator acquisition, valued at $388.3 million, added $157.8 million of revenue from acquisition through year-end and expanded federal, cyber and critical-infrastructure capabilities.
  • Equity earnings from unconsolidated joint ventures fell 55.7% to $16.3 million. The company recorded a $13.8 million write-down on a Critical Infrastructure joint venture, reducing diluted EPS by $0.09.
  • The effective tax rate rose to 23.9% from 21.0%. The company reported an approximately $16 million additional 2022 cash-tax liability related to required amortization of research and development expenditures; it estimated this provision could increase 2023 cash taxes by approximately $12 million.

Outlook, commentary and risks

  • The filing provides no quantified company-wide revenue or earnings guidance. Management cited demand drivers including defense and intelligence spending, cybersecurity, space and missile defense, infrastructure modernization and digital transformation. It also described growth, margin expansion and positive cash flow as priorities.
  • Management reported a 48.6% overall win rate in 2022, down from 56.0% in 2021; federal recompete win rates exceeded 90% in 2022. Overall book-to-bill was 1.0, versus 1.2 in 2021; Federal Solutions was 0.9 and Critical Infrastructure 1.2.
  • Backlog is not guaranteed revenue: federal work depends on annual appropriations, and contracts may be terminated or options not exercised. A substantial portion of revenue comes from the U.S. federal government (53% in 2022).
  • Key risks include government budget and procurement changes, contract competition and protests, cost-estimation and fixed-price project exposure, recruiting and retaining cleared staff, cyber incidents, acquisition integration, inflation and supply-chain disruption, foreign-market and currency exposure, and joint-venture obligations. At year-end, joint-venture-related letters of credit and guarantees totaled $106.8 million.
  • A False Claims Act qui tam case remained unresolved; the company said it could not determine the probability of outcome or estimate a potential loss range. Government contract audits also remain a contingency, though management reported no material historical disallowed costs.
  • Parsons said it had adequate liquidity for at least 12 months and was in compliance with debt covenants. The auditor issued unqualified opinions on the financial statements and internal control; Xator was excluded from the internal-control assessment and audit.

Important facts for investors to verify

  • How funded backlog converts into revenue and whether Federal Solutions’ below-1.0 book-to-bill improves.
  • Whether cash generation and working-capital collection keep pace with growth, particularly given higher receivables and 69-day net DSO.
  • Integration and returns from Xator, alongside debt service, the 2025 convertible-note maturity and the floating-rate term loan.
  • Resolution of the False Claims Act litigation, government audits, and the $13.8 million joint-venture write-down and related project exposures.
  • Potential dilution from the convertible notes: 8.9 million underlying shares, partly offset economically by the note hedge; also monitor ESOP ownership and share distributions.